ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For
the fiscal year ended March 31, 2010

Castle
Brands Inc.

(Exact
name of registrant as specified in its charter)

Florida

001-32849

41-2103550

(State
or other jurisdiction of

incorporation
or organization)

(Commission
File Number)

(I.R.S.
EmployerIdentification
No.)

122
East 42nd
Street, Suite 4700

New
York, New York

10168

(Address
of principal executive offices)

(Zip
Code)

Registrant’s
telephone number, including area code (646) 356-0200

Securities
registered pursuant to Section 12(b) of the Act:

Title
of Each Class

Name
of Each Exchange on Which Registered

Common
stock, $0.01 par value

NYSE
Amex

Securities
registered pursuant to Section 12(g) of the Act:

None.

Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ¨No x

Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨No x

Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes xNo ¨

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨No ¨

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x

Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.

¨ Large accelerated
filer

¨ Accelerated
filer

¨ Non-accelerated
filer

x Smaller reporting
company

Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ¨No x

The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant based on the September 30, 2009 closing price was
approximately $7,100,000 based on the closing price per share as
reported on the NYSE Amex on such date. The registrant had 107,202,145 shares of
common stock outstanding at June 25, 2010.

DOCUMENTS
INCORPORATED BY REFERENCE

Part III
(Items 10, 11, 12, 13 and 14) of this annual report on Form 10-K is
incorporated by reference from the definitive Proxy Statement for the 2010
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the registrant’s fiscal
year covered by this report.

We
develop and market premium and super-premium brands in the following beverage
alcohol categories: rum, whiskey, liqueurs, vodka, tequila and fine wine. We
distribute our products in all 50 U.S. states and the District of Columbia, in
twelve primary international markets, including Ireland, Great Britain, Northern
Ireland, Germany, Canada, Bulgaria, France, Russia, Finland, Norway, Sweden,
China and the Duty Free markets, and in a number of other countries in
continental Europe and Latin America. We market the following brands, among
others, Gosling’s Rum®,
Jefferson’sTM,
Jefferson’s Reserve® and
Jefferson’sTM
Presidential Select bourbons, Clontarf® Irish
whiskey, Pallini®
liqueurs, Boru® vodka,
Knappogue Castle Whiskey®,
TierrasTM tequila
and Betts & SchollTM
wines.

Effective
as of February 9, 2010, we completed a reincorporation transaction under which
Castle Brands Inc., a Delaware corporation (“Castle Delaware”), merged with and
into Castle Brands (Florida) Inc., a Florida corporation and wholly-owned
subsidiary of Castle Delaware (“Castle Florida”), with Castle Florida being the
surviving entity and being renamed Castle Brands Inc. As a result of the
reincorporation, the legal domicile of the surviving entity is now the State of
Florida. In the reincorporation, each outstanding share of Castle
Delaware common stock, par value $0.01 per share, was converted into one share
of Castle Florida common stock, par value $0.01 per share.

Castle
Florida was incorporated in Florida in 2009 and is the successor to Castle
Delaware, which was incorporated in Delaware in 2003.

Our brands

We
market the premium and super-premium brands listed below.

Gosling’s
rum. We are the exclusive U.S. distributor for Gosling’s rums, including
Gosling’s Black Seal Dark Rum, Gosling’s Gold Bermuda Rum and Gosling’s Old Rum.
The Gosling family produces these rums in Bermuda, where Gosling’s rums have
been under continuous production and ownership by the Gosling family for over
200 years. We hold a 60% controlling interest in Gosling-Castle Partners,
Inc., a global export venture between us and the Gosling family. Gosling-Castle
Partners has the exclusive long-term export and distribution rights for the
Gosling’s rum products for all countries other than Bermuda. The Gosling’s rum
brands accounted for approximately 32% and 31% of our revenues for our 2010 and
2009 fiscal years, respectively. We have also introduced Gosling’s Stormy Ginger
Beer, an essential non-alcoholic ingredient in Gosling’s trademarked Dark ‘n
Stormy® rum
cocktail.

Jefferson’s
bourbons. We develop and market three premium, very small batch bourbons:
Jefferson’s, Jefferson’s Reserve and Jefferson’s Presidential Select. We offer
these three distinct premium Kentucky bourbons, each of which is blended in
batches of eight to twelve barrels to produce specific flavor
profiles.

Clontarf Irish
whiskeys. Our family of Clontarf Irish whiskeys currently represents a
majority of our case sales of Irish whiskey. Clontarf, an accessible and smooth
premium Irish whiskey, is distilled using quality grains and pure Irish spring
water. Clontarf is then aged in bourbon barrels and mellowed through Irish oak
charcoal. Clontarf is available in single malt and classic
versions.

Knappogue
Castle Whiskey. We developed our Knappogue Castle Whiskey, a single malt
Irish whiskey to build on both the popularity of single malt Scotch whisky and
the growth in the Irish whiskey category. Knappogue Castle Whiskey is distilled
in pot stills using malted barley and is vintage-dated based on the year of
distillation.

Knappogue
Castle 1951. Knappogue Castle 1951 is a pure pot-still whiskey that was
distilled in 1951 and then aged for 36 years in sherry casks. The name
comes from an Irish castle, formerly owned by Mark Edwin Andrews, the originator
of the brand and the father of Mark Andrews, our chairman.

Pallini
liqueurs. We have the long-term exclusive U.S. distribution rights
(excluding duty free sales) for Pallini Limoncello and its related brand
extensions. Pallini Limoncello is a premium lemon liqueur, which is served iced
cold, on the rocks or as an ingredient in a wide variety of drinks, ranging from
martinis to iced tea. It is also used in cooking, particularly for pastries and
cakes. Pallini Limoncello is crafted from an authentic family recipe. It is made
with Italy’s finest Sfusato Amalfitano lemons that are hand-selected for optimal
freshness and flavor. There are two other flavor extensions of this Italian
liqueur: Pallini Peachcello made with white peaches, and Pallini Raspicello,
made from a combination of raspberries and other berries.

3

Boru
vodka. Boru vodka, a premium vodka produced in Ireland, was developed in
1998 and is named after the legendary High King of Ireland, Brian Boru, who
united the Irish clans and drove foreign invaders out of Ireland. It is
five-times distilled using pure spring water for smoothness and filtered through
ten feet of charcoal made from Irish oak for increased purity. We offer three
flavor extensions of Boru vodka: Boru Citrus, Boru Orange and Boru Crazzberry (a
cranberry/raspberry flavor fusion).

Tierras
tequila. In 2009, we launched a new brand of organic, super-premium
tequila, “Tequila Tierras Autenticas de Jalisco”TM or
“Tierras”. Tierras is the first USDA certified organic tequila in the United
States and is available as blanco, reposado and añejo. We are the exclusive U.S.
importer and marketer of Tierras.

Brady’s
Irish cream liqueur. Brady’s Irish Cream, a high quality Irish cream, is
made in small batches using Irish whiskey, dairy fresh cream and natural
flavors.

Celtic
Crossing liqueur. We have the exclusive worldwide distribution rights for
Celtic Crossing, a premium brand of Irish liqueur that is a unique combination
of Irish spirits, cognac and a taste of honey. We have a 60% ownership interest
in Celtic Crossing in the United States, Canada, Mexico, Puerto Rico and the
islands between North and South America. Gaelic Heritage Corporation Limited, an
affiliate of one of our bottlers, has the exclusive rights to produce and supply
us with Celtic Crossing.

Betts
& Scholl wines. Betts & Scholl is a family of fine wines that
includes Grenache, Syrah and Riesling from Australia, Syrah from California, and
Hermitage Blanc and Rouge from France. Each bottle of Betts & Scholl
features the artwork of internationally renowned contemporary
artists.

Our
strategy

Our
objective is to continue building a distinctive portfolio of global premium and
super-premium spirits and wine brands. To achieve this, we continue to seek
to:

•

increase
revenues from existing brands. We are focusing our existing
distribution relationships, sales expertise and targeted marketing
activities to concentrate on our more profitable brands by expanding our
domestic and international distribution relationships to increase the
mutual benefits of concentrating on our most profitable brands, while
continuing to achieve brand recognition and growth and gain additional
market share for our brands within retail stores, bars and restaurants,
and thereby with end consumers;

•

improve
value chain and manage cost structure. We have undergone a
comprehensive review and analysis of our supply chain and cost structure
both on a company-wide and brand-by-brand basis. This has included
restructurings and personnel reductions throughout our company. We further
intend to map, analyze and redesign our purchasing and supply systems to
reduce costs in our current operations and achieve profitability in future
operations;

•

selectively
add new premium brands to our portfolio. We intend to continue
developing new brands and pursuing strategic relationships, joint ventures
and acquisitions to selectively expand our premium spirits and wine
portfolio, particularly by capitalizing on and expanding our already
demonstrated partnering capabilities. Our criteria for new brands focuses
on underserved areas of the beverage alcohol marketplace, while examining
the potential for direct financial contribution to our company and the
potential for future growth based on development and maturation of agency
brands. We will evaluate future acquisitions and agency relationships on
the basis of their potential to be immediately accretive and their
potential contributions to our objectives of becoming profitable and
further expanding our product offerings. We expect that future
acquisitions, if consummated, would involve some combination of cash, debt
and the issuance of our stock; and

•

contain
costs. We have taken significant steps to reduce our costs, which
has resulted in a significant decrease in selling expense and general and
administrative expense. These steps included: reducing staff in our U.S.
and international operations; restructuring our international distribution
system; changing distributor relationships in certain markets;
restructuring the Gosling-Castle Partners, Inc. working relationship;
moving production of certain products to a lower cost facility in the
U.S.; and reducing general and administrative costs, including
professional fees, insurance, occupancy and other overhead costs. Efforts
to reduce expenses further
continue.

The
success of our efforts is reflected in our operating results as our loss from
operations improved $14.7 million, or 71.8%, for the year ended March 31, 2010
from the prior-year period. As result of our continued cost containment efforts,
our focus on our more profitable brands and markets, the expected organic growth
of our existing brands, the success of our recently-released Tierras tequila and
Jefferson’s Presidential Select bourbon and our newly-created Fine Wine
Division, we anticipate continued improved results of operations as we move
towards profitability.

4

Production
and supply

There
are several steps in the production and supply process for beverage alcohol
products. First, all of our spirits products are distilled. This is a
multi-stage process that converts basic ingredients, such as grain, sugar cane
or agave, into alcohol. Next, the alcohol is processed and/or aged in various
ways depending on the requirements of the specific brand. For our vodka, this
processing is designed to remove all other chemicals, so that the resulting
liquid will be odorless and colorless, and have a smooth quality with minimal
harshness. Achieving a high level of purity involves a series of distillations
and filtration processes.

For
our flavored vodkas and all of our other spirits brands, rather than removing
flavor, various complex flavor profiles are achieved through one or more of the
following techniques: infusion of fruit, addition of various flavoring
substances, and, in the case of rums and whiskeys, aging of the brands in
various types of casks for extended periods of time and the blending of several
rums or whiskeys to achieve a unique flavor profile for each brand. For our
wines we work with specific growers and winemakers to produce proprietary
expressions of wine from prestigious appellations. After the distillation,
purification and flavoring processes are completed, the various liquids are
bottled. This involves several important stages, including bottle and label
design and procurement, filling of the bottles and packaging the bottles in
various configurations for shipment.

We
do not have significant investments in grape contracts, wine making
distillation, bottling or other production facilities or equipment. Instead, we
have entered into relationships with several companies to provide those services
to us. We believe that these types of arrangements allow us to avoid committing
significant amounts of capital to fixed assets and permit us to have the
flexibility to meet growing sales levels by dealing with companies whose
capacity significantly exceeds our current needs. These relationships vary on a
brand-by-brand basis as discussed below. As part of our ongoing cost-containment
efforts, we intend to continue to review each of our business relationships to
determine if we can increase the efficiency of our operations.

Gosling’s
rum

The
Gosling’s rums have been produced by Gosling’s Brothers Limited in Hamilton,
Bermuda for over 200 years and, pursuant to our distribution arrangements
with Gosling's Export (Bermuda) Limited, referred to as Gosling’s Export,, they
have retained the right to act as the sole supplier to Gosling-Castle Partners
Inc. with respect to our Gosling’s rum requirements. Gosling's sources their
rums in the Caribbean and transports them to Bermuda where they are blended
according to proprietary recipes. The rums are then sent to Heaven Hill
Distilleries, Inc.’s plant in Bardstown, Kentucky where they are bottled,
packaged, stored and shipped to our third-party warehouse. In 2007, Gosling’s
increased its blending and storage facilities in Bermuda to accommodate our
supply needs for the foreseeable future. We believe Heaven Hill has ample
capacity to meet our projected supply needs. See “Strategic brand - partner
relationships.”

Knappogue
Castle and Clontarf Irish whiskeys

In
2005, we entered into a long-term supply agreement with Irish Distillers
Limited, a subsidiary of Pernod Ricard, under which it has agreed to supply us
with the aged single malt and grain whiskeys used in our Knappogue Castle
Whiskey, a Knappogue Castle Whiskey blend we may produce in the future and all
of our Clontarf Irish whiskey products. The supply agreement provides for Irish
Distillers to meet our running ten-year estimate of supply needs for these
products, each of which is produced to a flavor profile prescribed by us. At the
beginning of each year of the agreement, we must specify our supply needs for
each product for that year, which amounts we are then obligated to purchase over
the course of that year. These amounts may not exceed the annual amounts set
forth in the running ten-year estimate unless approved by Irish Distillers. The
agreement provides for fixed prices for the whiskeys used in each product, with
escalations based on certain cost increases. The whiskeys are then sent to Terra
Limited (“Terra”) in Baileyboro, Ireland, where they are bottled in bottles we
designed and packaged for shipment. We believe that both Terra, which also acts
as bottler for all of our Boru Vodka and as producer and bottler of our Brady’s
Irish cream (and as bottler for Celtic Crossing, which is supplied to us by one
of Terra’s affiliates), has sufficient bottling capacity to meet our current
needs, and both Terra and Irish Distillers have the capacity to meet our future
supply needs.

Terra
provides intake, storage, sampling, testing, filtering, filling, capping and
labeling of bottles, case packing, warehousing and loading and inventory control
for our Boru vodkas and our Knappogue Castle and Clontarf Irish whiskeys at
prices that are adjusted annually by mutual agreement based on changes in raw
materials and consumer price indexes increases up to 3.5% per annum. This
agreement also provides for maintenance of product specifications and minimum
processing procedures, including compliance with applicable food and alcohol
regulations and maintenance, storage and stock control of all raw products and
finished products delivered to Terra. Terra holds all alcohol on its premises
under its customs and excise bond. Our bottling and services agreement with
Terra will expire on June 30, 2010. We expect to continue to operate under the
terms of the expiring contract as we negotiate a new agreement with Terra. We
believe we could obtain alternative sources of bottling and services if we are
unable to extend or renew the existing Terra contract.

5

Jefferson’s
bourbons

Jefferson’s
and Jefferson’s Reserve bourbons are produced for us by Kentucky Bourbon
Distillers in Bardstown, Kentucky. Previously, Kentucky Bourbon Distillers sold
barrels of aged bourbon to us, from which we blended no more than eight to
twelve barrels to produce specific flavor profiles of each of our bourbon
products. Kentucky Bourbon Distillers then bottled the bourbons in bottles
designed and decorated for us and through third party suppliers. Bourbon has
been in short supply in the United States in recent years, and we have been
actively seeking alternate sourcing for future supply. In December 2009, in
order to bolster our bourbon supply, we acquired a rare stock of aged bourbon
which will supply our currently forecasted supply needs for Jefferson’s and
Jefferson’s Reserve.

Pallini
liqueurs

I.L.A.R.
S.p.A./Pallini Internazionale, an Italian company based in Rome and owned since
1875 by the Pallini family, produces Pallini Limoncello, Raspicello and
Peachcello. I.L.A.R. makes their Limoncello using Sfusato Amalfitano lemons in a
proprietary infusion process. I.L.A.R. also produces Pallini Peachcello, using
white peaches and Pallini Raspicello, using a combination of raspberries and
other berries. I.L.A.R. bottles the liqueurs at its plant in Rome and ships them
to us under our long-term exclusive U.S. marketing and distribution agreement.
We believe that I.L.A.R. has adequate facilities to produce and bottle
sufficient Limoncello, Peachcello and Raspicello to meet our foreseeable needs.
See “Strategic brand-partner relationships.”

Boru
vodka

We
have a supply agreement with Royal Nedalco B.V., a leading European producer of
grain neutral spirits, to provide us with the distilled alcohol used in our Boru
vodka. The supply agreement provides for Royal Nedalco to produce natural spirit
for us with specified levels of alcohol content pursuant to specifications set
forth in the agreement and at specified prices through its expiration in
December 2010, in quantities designated by us. We believe that Royal
Nedalco has sufficient distilling capacity to meet our needs for Boru vodka for
the foreseeable future. In the event that we do not renew the Royal Nedalco
agreement, we believe that we will be able to obtain grain neutral spirits from
another supplier.

The
five-times distilled alcohol is delivered from Royal Nedalco to the bottling
premises at Terra, where it is filtered in several proprietary ways, pure water
is added to achieve the desired proof, and, in the case of the citrus, orange
and Crazzberry versions of Boru vodka, flavorings are added. Depending on the
size of the bottle, Boru vodka is then either bottled at Terra or shipped in
bulk to the United States and bottled at Lawrenceburg Distillers, Inc. (“LDI”)
in Lawrenceburg, Indiana, where we bottle certain sizes for the U.S. market. We
believe that both Terra and LDI have sufficient bottling capacity to meet our
current needs, and both have the capacity to meet our future supply
needs.

Brady’s
Irish cream

Brady’s
Irish cream is produced for us by Terra. Fresh cream is combined with Irish
whiskey, grain neutral spirits and various flavorings to our specifications, and
then bottled by Terra in bottles designed for us. We believe that Terra has the
capacity to meet our foreseeable supply needs for this brand.

Celtic
Crossing liqueur

We
have exclusive worldwide distribution rights to the Celtic Crossing brand of
Irish liqueur and a 60% ownership interest in the Celtic Crossing brand in the
United States, Canada, Mexico, Puerto Rico and the islands between North and
South America. Gaelic Heritage Corporation Limited, an affiliate of Terra, has a
contractual right to act as the sole supplier to us of Celtic Crossing. Gaelic
Heritage mixes the ingredients comprising Celtic Crossing using a proprietary
formula and then Terra bottles it for them in bottles designed for us. We
believe that the necessary ingredients are available to Gaelic Heritage in
sufficient supply and that Terra’s bottling capacity is currently adequate to
meet our projected supply needs. See “Strategic brand-partner
relationships.”

Tierras
tequila

Tierras
Tequila Autenticas de Jalisco or “Tierras” is being produced for us in Mexico by
Autentica Tequilera S.A. de C.V. Autentica Tequilera currently organic agave,
and together with its affiliates is in the process of cultivating its own supply
of organic agave. Autentica Tequilera distills and bottles the tequila at its
facility in the Jalisco region of Mexico. Tierras is available as blanco,
reposado and añejo. The blanco is unaged, the reposado is aged in oak barrels at
the distillery for up to one year, and the añejo is aged in oak barrels at the
distillery for at least one year. We believe that, given the ability of
Autentica Tequilera to purchase organic agave and its anticipated cultivation of
organic agave, that Autentica Tequilera has sufficient capacity to meet our
foreseeable supply needs for this brand.

6

Betts
& Scholl wines

The
Betts and Scholl wines are being produced for us by well regarded winemakers in
the Barossa Valley in Australia and Hermitage France. In Australia,
Richard Betts works with Rusden Wines to produce the OG, Chronique and Black
Betty wines. In France, the winemaker Jean-Louis Chave produces,
blends and bottles our Red and White Hermitage wines. Although we do
not have formal agreements with theses parties, we believe that these
relationships are strong enough and that the availability of wine is such that
these producers will be able to provide a sufficient quantity of wine to fulfill
our requirements into the foreseeable future.

Distribution
network

We
believe that one of our strengths is the distribution network that we have
developed with our sales team and our independent distributors and brokers. We
currently have distribution and brokerage relationships with third-party
distributors in all 50 U.S. states, as well as material distribution
arrangements in approximately 25 other countries.

U.S.
distribution

Background.
Importers of beverage alcohol in the United States must sell their products
through a three-tier distribution system. Typically, an imported brand is first
sold to a U.S. importer, who then sells it to a network of distributors, or
wholesalers, covering the Unites States, in either “open” states or “control”
states. In the 32 open states, the distributors are generally large,
privately-held companies. In the 18 control states, the states themselves
function as the distributor, and regulate suppliers such as us. The distributors
and wholesalers in turn sell to individual retailers, such as liquor stores,
restaurants, bars, supermarkets and other outlets licensed to sell beverage
alcohol. In larger states such as New York, more than one distributor may handle
a brand in separate geographical areas. In control states, importers sell their
products directly to state liquor authorities, which distribute the products and
either operate retail outlets or license the retail sales function to private
companies, while maintaining strict control over pricing and
profit.

The
U.S. wine and spirits industry has consolidated dramatically over the last ten
years due to merger and acquisition activity. There are currently six major
spirits companies, each of which own and operate their own importing businesses.
All companies, including these large companies, are required by law to sell
their products through wholesale distributors in the United States. The major
companies are exerting increasing influence over the regional distributors and
as a result, it has become more difficult for smaller companies to get their
products recognized by the distributors. We believe our established distribution
network in all 50 states allows us to overcome a significant barrier to entry in
the U.S. beverage alcohol market and enhances our attractiveness as a strategic
partner for smaller companies lacking comparable distribution.

For
fiscal 2010, our U.S. sales represented approximately 85.1% of our revenues, and
we expect them to grow as a percentage of our total sales in the future. See
note 17 to our accompanying consolidated financial statements.

Importation.
We currently hold the federal importer and wholesaler license required by the
Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department, and
the requisite state license in 49 states and the District of
Columbia.

Our
inventory is strategically maintained in large bonded warehouses and shipped
nationally by an extensive network of licensed and bonded carriers.

Until
recently, it was more cost effective for us to use MHW Ltd., a New York-based
nationally licensed importer, to coordinate the importing and industry
compliance required for the sales of our products across the United States. At
the current stage of our growth, it is now more economical for us to assume the
role of importer ourselves. While we continue to rely on MHW to perform certain
back office functions, we now act as an importer.

Wholesalers
and distributors. In the United States, we are required by law to use
state-licensed distributors or, in the control states, state-owned agencies
performing this function, to sell our brands to retail outlets. As a result, we
depend on distributors for sales, for product placement and for retail store
penetration. We currently have no distribution agreements or minimum sales
requirements with any of our U.S. alcohol distributors, and they are under no
obligation to place our products or market our brands. All of the distributors
also distribute our competitors’ products and brands. As a result, we must
foster and maintain our relationships with our distributors. Through our
internal sales team, we have established relationships for our brands with
wholesale distributors in each state, and our products are currently sold in the
United States by approximately 80 wholesale distributors, as well as by various
state beverage alcohol control agencies.

International
distribution

In
our foreign markets, most countries permit sales directly from the brand owner
to retail establishments, including liquor stores, chain stores, restaurants and
pubs, without requiring that sales go through a wholesaler tier. In our
international markets, we rely primarily on established spirits distributors in
much the same way as we do in the United States. We use Terra to handle the
billing, inventory and shipping for us with respect to certain products in
certain of our non-U.S. markets.

7

As
in the United States, the beverage alcohol industry has undergone consolidation
internationally, with considerable realignment of brands and brand ownership.
The number of major spirits companies internationally has been reduced
significantly due to mergers and brand ownership consolidation. While there are
still a substantial number of companies owning one or more brands, most business
is now done by the six major companies, each of whom owns and operates its own
distribution company in the major international markets. These captive
distribution companies focus primarily on the brands of the companies that own
them.

Even
though we do not utilize the direct route to market in our international
operations, we do not believe that we are at a significant disadvantage, because
the local importers/distributors typically have established relationships with
the retail accounts and are able to provide extensive customer service, in store
merchandising and on premise promotions. Also, even though we must compensate
our wholesalers and distributors in each market in which we sell our brands, we
are, as a result of using these distributors, still able to benefit from
substantially lower infrastructure costs and centralized billing and
collection.

Our
primary international markets are Ireland, Great Britain, Northern Ireland,
Germany, Canada, France, Italy, Sweden and the Duty Free markets. We also have
sales in other countries in continental Europe, Latin America, the Caribbean and
Asia. For fiscal 2010, non-U.S. sales represented 14.9% of our revenues. See
note 17 to our accompanying consolidated financial statements.

Significant
customers

Sales
to one distributor, Southern Wine and Spirits and related entities, accounted
for approximately 32.1% of our consolidated revenues for fiscal
2010.

Our
sales team

While
we currently expect more rapid growth in the United States, our primary market,
international markets hold potential and are part of our global strategy. We
have realigned our international strategy on a market-by-market basis to
strengthen our distributor relationships, optimize our sales team and
effectively focus our financial resources.

We
currently have a total sales force of 14 people, including six regional U.S.
sales managers and one international sales manager, with an average of over
15 years of industry experience with premium beverage alcohol
brands.

To
build our brands, we must effectively communicate with three distinct audiences:
our distributors, the retail trade and the end consumer. Advertising, marketing
and promotional activities help to establish and reinforce the image of our
brands in our efforts to build substantial brand value. We believe our execution
of disciplined and strategic branding and marketing campaigns will continue to
drive our future sales.

We
employ full-time, in-house marketing, sales and customer service personnel who
work together with third party design and advertising firms to maintain a high
degree of focus on each of our product categories and build brand awareness
through innovative marketing activities. We use a range of marketing strategies
and tactics to build brand equity and increase sales, including consumer and
trade advertising, price promotions, point-of-sale materials, event sponsorship,
in-store and on-premise promotions and public relations, as well as a variety of
other traditional and non-traditional marketing techniques to support our
brands.

Besides
traditional advertising, we also employ three other marketing methods to support
our brands: public relations, event sponsorships and tastings. Our significant
U.S. public relations efforts have helped gain editorial coverage for our
brands, which increases brand awareness. Event sponsorship is an economical way
for us to have influential consumers taste our brands. We actively contribute
product to trend-setting events where our brand has exclusivity in the brand
category. We also conduct hundreds of in-store and on-premise promotions each
year.

We
support our brand marketing efforts with an assortment of point-of-sale
materials. The combination of trade and consumer programs, supported by
attractive point-of-sale materials, also establishes greater credibility for us
with our distributors and retailers.

8

Strategic
brand-partner relationships

We
forge strategic relationships with emerging and established spirits brand owners
seeking opportunities to increase their sales beyond their home markets and
achieve global growth. This ability is a key component of our growth strategy
and one of our competitive strengths. Our original relationship with the Boru
vodka brand was as its exclusive U.S. distributor. To date, we have also
established strategic relationships for Gosling’s rum, the Pallini liqueurs,
Tierras Tequila and Celtic Crossing, as described below, and we intend to seek
to expand our brand portfolio through similar future arrangements.

Gosling-Castle
Partners Inc./Gosling’s rums

In
2005, we entered into an exclusive national distribution agreement with
Gosling’s Export for the Gosling’s rum products. We subsequently purchased a 60%
controlling interest in Gosling-Castle Partners, Inc., a strategic export
venture with the Gosling family. Gosling's Export holds the exclusive
distribution rights for Gosling’s rum and related products on a worldwide basis
(other than in Bermuda), through Gosling-Castle Partners, and assigned to
Gosling-Castle Partners all of Gosling’s Export’s interest in our
January 2005 U.S. distribution agreement with them. The export agreement
expires in April 2020, subject to a 15 year extension if certain case sale
targets are met. Under the export agreement, Gosling-Castle Partners is
generally entitled to a share of the proceeds from the sale, if ever, of the
ownership of any of the Gosling’s brands to a third-party, through a sale of the
stock of Gosling’s Export or its parent, with the size of such share depending
upon the number of case sales made during the twelve months preceding the sale.
Also, prior to selling the ownership of any of their brands that are subject to
these agreements, Gosling’s Export must first offer such brand to Gosling-Castle
Partners and then to us. The Goslings, through Gosling’s Brothers Limited, have
the right to act as the sole supplier to Gosling-Castle Partners for our
Gosling’s rum requirements.

I.L.A.R.
S.p.A./Pallini Internazionale

We
have a long-term, exclusive marketing and distribution agreement with I.L.A.R.
S.p.A., a family-owned Italian spirits company founded in 1875, under which we
distribute Pallini Limoncello, Peachcello and Raspicello liqueurs in the United
States. We began shipping these products in September 2005.

Under
the agreement, I.L.A.R. may raise agreed prices as long as the price increases
do not exceed those of major competitors for comparable products. I.L.A.R. is
required to maintain certain product standards, and we have input into
adjustments of the product and packaging. We are required to prepare a
preliminary annual strategy plan for advertising and distribution for review by
I.L.A.R. and are required to make certain advertising, marketing and promotional
expenditures based on volume. The agreement was automatically renewed under its
terms on December 31, 2009 for an additional three years.

Autentica
Tequilera S.A. de C.V./Tierras tequila

In
February 2008, we entered into an importation and marketing agreement with
Autentica Tequilera S.A. de C.V., under which we became the exclusive U.S.
importer of an organic, super premium tequila, Tequila Tierras Autenticas de
Jalisco or “Tierras.”

The
agreement has a five-year term, with automatic five-year renewals based upon
sales targets. During the term, we have the right to purchase tequila at
stipulated prices. Autentica Tequilera must maintain certain standards for its
products, and we have input into the product and packaging. We are required to
prepare periodic reports detailing the development of the brand’s sales. Under
this agreement, we have rights of first refusal for any new market for Tierras
(except Mexico), and any new Autentica Tequilera products in any market (except
Mexico). We also have a right of first refusal on any sale of the Tierras brand,
and a right to acquire up to 35% of the economic benefit of any such sale with a
third-party based upon the achievement of certain cumulative sales
targets.

Gaelic
Heritage Corporation Limited/Celtic Crossing

In
March 1998, we entered into an exclusive national distribution agreement
with Gaelic Heritage Corporation Limited, an affiliate of Terra, one of our
suppliers, which was amended in April 2001, under which we acquired from
Gaelic a 60% ownership interest, and our former importer, MHW, acquired a 10%
ownership interest, in the Celtic Crossing brand in the United States, Canada,
Mexico, Puerto Rico and the islands between North and South America. We also
have the right to acquire 70% of the ownership of the Celtic Crossing brand in
the remainder of the world. We also acquired the exclusive right to distribute
Celtic Crossing on a world-wide basis. Under the terms of the agreement with
Gaelic, as amended, we have the right to purchase from Gaelic, based upon our
forecasts, cases of Celtic Crossing at annually agreed costs and a royalty
payment per case sold at various rates depending on the territory and type of
case sold. During the agreement term, we may not distribute any other Irish
liqueur unless it is bottled in Terra’s facilities or unless Gaelic provides its
prior written consent. The agreement continues until terminated by either
party.

9

Intellectual
property

Trademarks
are an important aspect of our business. We sell our products under a number of
trademarks, which we own or use under license. Our brands are protected by
trademark registrations or are the subject of pending applications for trademark
registration in the United States, the European Community and most other
countries where we distribute, or plan to distribute, our brands. The trademarks
may be registered in the names of our subsidiaries and related companies.
Generally, the term of a trademark registration varies from country to country,
and, in the United States, trademark registrations need to be renewed every ten
years. We expect to register our trademarks in additional markets as we expand
our distribution territories.

We
have entered into distribution agreements for brands owned by third parties,
such as the Gosling’s rums, the Pallini liqueurs and Tierras Tequila. The
Gosling’s rum brands and Pallini liqueurs are registered by their respective
owners and we have the exclusive right to distribute the Gosling’s rums on a
worldwide basis (other than in Bermuda) and the Pallini liqueur brands in the
United States. Gosling’s also has a trademark for their signature rum cocktail,
Dark ‘n Stormy. Autentica Tequiliera holds the registered U.S. trademark for
Tequila Tierras Autenticas de Jalisco and its distinctive label. See “Strategic
brand-partner relationships.”

Our
unique “trinity” bottle is the subject of Irish and UK utility patents owned by
The Castle Brands (Research & Development) Company Limited and a U.S. Design
patent owned by our subsidiary Castle Brands Spirits Company
Limited. The Castle Brands (Research & Development) Company
Limited granted us an exclusive license to use the patents for a five-year term
that expired in December 2008. The license agreement provided for a royalty
equal to 8% of the net invoice price of trinity bottle products covered by these
patents sold or otherwise disposed of by us, subject to a maximum of €30,000
($40,360) per year. We continue to operate under the terms of the expired
license agreement. We are evaluating the possibility of extending the license or
purchasing the patent.

Seasonality

Our
industry is subject to seasonality with peak retail sales generally occurring in
the fourth calendar quarter (our third fiscal quarter) primarily due to seasonal
holiday buying. This holiday demand typically results in slightly higher sales
for us in our second and/or third fiscal quarters.

Competition

The
beverage alcohol industry is highly competitive. We believe that we compete on
the basis of quality, price, brand recognition and distribution strength. Our
premium brands compete with other alcoholic and nonalcoholic beverages for
consumer purchases, retail shelf space, restaurant presence and wholesaler
attention. We compete with numerous multinational producers and distributors of
beverage alcohol products, many of which have greater resources than
us.

Over
the past ten years, the U.S. wine and spirits industry has undergone dramatic
consolidation and realignment of brands and brand ownership. The number of major
importers in the United States has declined significantly. Today there are six
major companies: Diageo, Pernod Ricard, Bacardi, Brown-Forman, Future Brands and
Constellation Brands.

We
believe that we are sometimes in a better position to partner with small to
mid-size brands than the six major importers. Despite our relative capital
position and resources, we have been able to compete with these larger companies
in pursuing agency distribution agreements and acquiring brands by being more
responsive to private and family-owned brands, offering flexible transaction
structures and providing brand owners the option to retain local production and
“home” market sales. Given our size relative to our major competitors, most of
which have multi-billion dollar operations, we believe that we can provide
greater focus on smaller brands and tailor structures based on individual brand
owner preferences.

By
focusing on the premium and super-premium segments of the market, which
typically have higher margins, and having an established, experienced sales
force, we believe we are able to gain relatively significant attention from our
distributors for a company of our size. Our U.S. regional sales managers, who
average over 15 years of industry experience, provide long-standing
relationships with distributor personnel and with their major customers.
Finally, the continued consolidation among the major companies is expected to
create an opportunity for small to mid-size wine and spirits companies, such as
ourselves, as the major companies contract their portfolios to focus on fewer
brands.

Government
regulation

We
are subject to the jurisdiction of the Federal Alcohol Administration Act, U.S.
Customs Laws, Internal Revenue Code of 1986, and the Alcoholic Beverage Control
Laws of all fifty states.

The
United States Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau
regulates the production, blending, bottling, sales and advertising and
transportation of alcohol products. Also, each state regulates the advertising,
promotion, transportation, sale and distribution of alcohol products within its
jurisdiction. We are also required to conduct business in the United States only
with holders of licenses to import, warehouse, transport, distribute and sell
spirits.

10

In
Europe, we are subject to similar regulations related to the production of
spirits, including, among others, the Food Hygiene Regulations 1950-1989,
European Communities (Hygiene of Foodstuffs) Regulations, 2000, European
Communities (Labeling, Presentation and Advertising of Food Stuffs) Regulations,
2002 , Irish Whiskey Act, 1980, European Communities (Definitions, Description
and Presentation of Spirit Drinks) Regulations, 1995, Merchandise Marks Act
1970, Licensing Act 2003 and Licensing Act Northern Ireland Order 1996 covering
the testing of raw materials used and the standards maintained in production
processing, storage, labeling, distribution and taxation.

The
United States and Europe regulate the advertising, marketing and sale of
beverage alcohol. These regulations range from a complete prohibition of the
marketing of alcohol in some countries to restrictions on the advertising style,
media and messages used.

Labeling
of wines and spirits is also regulated in many markets, varying from health
warning labels to importer identification, alcohol strength and other consumer
information. All beverage alcohol products sold in the United States must
include warning statements related to risks of drinking beverage alcohol
products.

In
the 18 U.S. control states, the state liquor commissions act in place of
distributors and decide which products are to be purchased and offered for sale
in their respective states. Products are selected for purchase and sale through
listing procedures which are generally made available to new products only at
periodically scheduled listing interviews. Consumers may purchase products not
selected for listings only through special orders, if at all.

The
distribution of alcohol-based beverages is also subject to extensive federal and
state taxation in the United States and internationally. Most foreign countries
in which we do business impose excise duties on wines and distilled spirits,
although the form of such taxation varies from a simple application on units of
alcohol by volume to intricate systems based on the imported or wholesale value
of the product. Several countries impose additional import duty on distilled
spirits, often discriminating between categories in the rate of such tariffs.
Import and excise duties may have a significant effect on our sales, both
through reducing the consumption of alcohol and through encouraging consumer
switching into lower-taxed categories of alcohol.

We
believe that we are in material compliance with applicable federal, state and
other regulations. However, we operate in a highly regulated industry which may
be subject to more stringent interpretations of existing regulations. Future
compliance costs due to regulatory changes could be significant.

Since
we import distilled spirits and wine products produced primarily outside the
U.S., adverse effects of regulatory changes are more likely to materially affect
earnings and our competitive market position rather than capital expenditures.
Capital expenditures in our industry are normally associated with either
production facilities or brand acquisition costs. Because we are not a U.S.
producer, changes in regulations affecting production facility operations may
indirectly affect the costs of the brands we purchase for resale, but we would
not anticipate any resulting material adverse impact upon our capital
expenditures.

Global
conglomerates with international brands dominate our industry. The adoption of
more restrictive marketing and sales regulations or increased excise taxes and
customs duties could materially adversely affect our earnings and competitive
industry position. Large international conglomerates have greater financial
resources than we do and would be better able to absorb increased compliance
costs.

Employees

As
of March 31, 2010, we had 40 full-time employees, of which 14 were in sales
and 26 were in management, finance, marketing and administration, as compared to
41 full-time employees at March 31, 2009. As of March 31, 2010, 37 of our
employees were located in the United States and three were located outside of
the United States, primarily in Ireland.

Geographic
Information

We
operate in one business — premium beverage alcohol. Our product categories are
rum, whiskey, liqueurs, vodka, tequila and wine. We report our operations in two
geographical areas: International and United States. See note 17 to our
accompanying consolidated financial statements.

11

Available
Information

Our
corporate filings, including our annual reports on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K, our proxy statements and
reports filed by our officers and directors under Section 16(a) of the
Securities Exchange Act, and any amendments to those filings, are available,
free of charge, on our investor website, http://investor.castlebrandsinc.com,
as soon as reasonably practicable after we electronically file or furnish such
material with the SEC. You may also find our code of business conduct,
nominating and governance charter and audit committee charter on our website. We
do not intend for information contained in our website, or those of our
subsidiaries, to be a part of this annual report on Form 10-K. Shareholders may
request paper copies of these filings and corporate governance documents,
without charge, by written request to Castle Brands Inc., 122 East 42nd St., Suite 4700, New
York, NY 10168, Attn: Investor Relations.

Also,
you may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE., Washington, DC 20549, on official business
days during the hours of 10 a.m. to 3 p.m. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC.

The
worldwide and domestic economies have experienced adverse conditions and may be
subject to further deterioration for the foreseeable future. We are subject to
risks associated with these adverse conditions, including economic slowdown and
the disruption, volatility and tightening of credit and capital
markets.

This
global economic situation could adversely impact our major suppliers,
distributors and retailers. The inability of suppliers, distributors or
retailers to conduct business or to access liquidity could impact our ability to
distribute our products.

The
timing and nature of any recovery in the financial markets remains uncertain,
and there can be no assurance that market conditions will improve in the near
future. A prolonged downturn, further worsening or broadening of the adverse
conditions in the worldwide and domestic economies could affect consumer
spending patterns and purchases of our products, and create or exacerbate credit
issues, cash flow issues and other financial hardships for us and for our
suppliers, distributors, retailers and consumers. Depending upon their severity
and duration, these conditions could have a material adverse impact on our
business, liquidity, financial condition and results of operations. We are
unable to predict the likely duration and severity of the current disruption in
the financial markets and the adverse economic conditions in the United States
and other markets.

We
have never been profitable, and believe we will continue to incur net losses for
the foreseeable future.

We
have incurred losses since our inception, including a net loss of
$2.9 million for fiscal 2010, and had an accumulated loss of
$112.1 million as of March 31, 2010. We believe that we will continue
to incur net losses for the foreseeable future as we expect to make continued
significant investment in product development and sales and marketing and to
incur significant administrative expenses as we seek to grow our brands. We also
anticipate that our cash needs will exceed our income from sales for the
foreseeable future. Various of our products may never achieve widespread market
acceptance and may not generate sales and profits to justify our investment
therein. Also, we may find that our expansion plans are more costly than we
anticipate and that they do not ultimately result in commensurate increases in
our sales, which would further increase our losses. We expect we will continue
to experience losses and negative cash flow, some of which could be significant.
Results of operations will depend upon numerous factors, some of which are
beyond our control, including market acceptance of our products, new product
introductions and competition. We incur substantial operating expenses at the
corporate level, including costs directly related to being an SEC reporting
company.

We
may require additional capital, which we may not be able to obtain on acceptable
terms. Our inability to raise such capital, as needed, on beneficial
terms or at all could restrict our future growth and severely limit our
operations.

We
have limited capital compared to other companies in our
industry. This may limit our operations and growth, including our
ability to continue to develop existing brands, service our debt obligations,
maintain adequate inventory levels ,fund potential acquisitions of new brands,
penetrate new markets, attract new customers and enter into new distribution
relationships. If we have not generated sufficient cash from operations to
finance additional capital needs, we will need to raise additional funds through
private or public equity and/or debt financing. We cannot assure you that, if
and when needed, additional financing will be available to us on acceptable
terms or at all. If additional capital is needed and either unavailable or cost
prohibitive, our operations and growth may be limited as we may need to change
our business strategy to slow the rate of, or eliminate, our expansion or reduce
or curtail our operations. Also, any additional financing we undertake could
impose covenants upon us that restrict our operating flexibility, and, if we
issue equity securities to raise capital, our existing shareholders may
experience dilution or the new securities may have rights senior to those of our
common stock.

If
our brands do not achieve more widespread consumer acceptance, our growth may be
limited.

Most
of our brands are early in their growth cycle and have not achieved global brand
recognition. Also, brands we may acquire in the future are unlikely to have
established global brand recognition. Accordingly, if consumers do not accept
our brands, we will not be able to penetrate our markets and our growth may be
limited.

12

We
depend on a limited number of suppliers. Failure to obtain satisfactory
performance from our suppliers or loss of our existing suppliers could cause us
to lose sales, incur additional costs and lose credibility in the marketplace.
We also have annual purchase obligations with certain suppliers.

We
depend on a limited number of third-party suppliers for the sourcing of all of
our products, including both our own proprietary brands and those we distribute
for others. These suppliers consist of third-party distillers, bottlers and
producers in the United States, Bermuda, the Caribbean, Australia and Europe. We
rely on the owners of Gosling’s rum, Pallini liqueurs and Tierras tequila to
produce their brands for us. For our proprietary products, we may rely on a
single supplier to fulfill one or all of the manufacturing functions for a
brand. For instance, Royal Nedalco is the sole producer for Boru vodka; Irish
Distillers Limited is the sole provider of our single malt, blended and grain
Irish whiskeys; Gaelic Heritage Corporation Limited is the sole producer of our
Celtic Crossing Irish liqueur; and Terra Limited is not only the sole producer
of our Brady’s Irish cream liqueur but also the only bottler of our Irish
whiskeys. We do not have long-term written agreements with all of our suppliers.
Also, if we fail to complete purchases of products ordered annually, certain
suppliers have the right to bill us for product not purchased during the period.
The termination of our written or oral agreements or an adverse change in the
terms of these agreements could have a negative impact on our business. If our
suppliers increase their prices, we may not have alternative sources of supply
and may not be able to raise the prices of our products to cover all or even a
portion of the increased costs. Also, our suppliers’ failure to perform
satisfactorily or handle increased orders, delays in shipments of products from
international suppliers or the loss of our existing suppliers, especially our
key suppliers, could cause us to fail to meet orders for our products, lose
sales, incur additional costs and/or expose us to product quality issues. In
turn, this could cause us to lose credibility in the marketplace and damage our
relationships with distributors, ultimately leading to a decline in our business
and results of operations. If we are not able to renegotiate these contracts on
acceptable terms or find suitable alternatives, our business could be negatively
impacted.

We
depend on our independent wholesale distributors to distribute our products. The
failure or inability of even a few of our distributors to adequately distribute
our products within their territories could harm our sales and result in a
decline in our results of operations.

We
are required by law to use state licensed distributors or, in 18 states known as
“control states,” state-owned agencies performing this function, to sell our
products to retail outlets, including liquor stores, bars, restaurants and
national chains in the United States. We have established relationships for our
brands with wholesale distributors in each state; however, failure to maintain
those relationships could significantly and adversely affect our business, sales
and growth. Over the past decade there has been increasing consolidation, both
intrastate and interstate, among distributors. As a result, many states now have
only two or three significant distributors. Also, there are several distributors
that now control distribution for not just one state but several states. As a
result, if we fail to maintain good relations with a distributor, our products
could in some instances be frozen out of one or more markets entirely. The
ultimate success of our products also depends in large part on our distributors’
ability and desire to distribute our products to our desired U.S. target
markets, as we rely significantly on them for product placement and retail store
penetration. We have no formal distribution agreements or minimum sales
requirements with any of our distributors and they are under no obligation to
place our products or market our brands. Moreover, all of them also distribute
competitive brands and product lines. We cannot assure you that our U.S. alcohol
distributors will continue to purchase our products, commit sufficient time and
resources to promote and market our brands and product lines or that they can or
will sell them to our desired or targeted markets. If they do not, our sales
will be harmed, resulting in a decline in our results of
operations.

While
most of our international markets do not require the use of independent
distributors by law, we have chosen to conduct our sales through distributors in
all of our markets and, accordingly, we face similar risks to those set forth
above with respect to our international distribution. Some of these
international markets may have only a limited number of viable
distributors.

The
sales of our products could decrease significantly if we cannot secure and
maintain listings in the control states.

In
the control states, the state liquor commissions act in place of distributors
and decide which products are to be purchased and offered for sale in their
respective states. Products selected for listing must generally reach certain
volumes and/or profit levels to maintain their listings. Products are selected
for purchase and sale through listing procedures which are generally made
available to new products only at periodically scheduled listing interviews.
Products not selected for listings can only be purchased by consumers in the
applicable control state through special orders, if at all. If, in the future,
we are unable to maintain our current listings in the 18 control states, or
secure and maintain listings in those states for any additional products we may
acquire, sales of our products could decrease significantly.

If
we are unable to identify and successfully acquire additional brands that are
complementary to our existing portfolio, our growth will be limited, and, even
if additional brands are acquired, we may not realize planned benefits due to
integration difficulties or other operating issues.

A
key component of our growth strategy is the acquisition of additional brands
that are complementary to our existing portfolio through acquisitions of such
brands or their corporate owners, directly or through mergers, joint ventures,
long-term exclusive distribution arrangements and/or other strategic
relationships. If we are unable to identify suitable brand candidates and
successfully execute our acquisition strategy, our growth will be limited. Also,
even if we are successful in acquiring additional brands, we may not be able to
achieve or maintain profitability levels that justify our investment in, or
realize operating and economic efficiencies or other planned benefits with
respect to, those additional brands. The addition of new products or businesses
entails numerous risks with respect to integration and other operating issues,
any of which could have a detrimental effect on our results of operations and/or
the value of our equity. These risks include:

negative effects on reported
results of operations from acquisition related charges and amortization of
acquired intangibles;

•

diversion of management’s
attention from other business
concerns;

•

adverse effects on existing
business relationships with suppliers, distributors and retail
customers;

•

risks of entering new markets or
markets in which we have limited prior experience;
and

•

the potential inability to retain
and motivate key employees of acquired
businesses

Also,
there are special risks associated with the acquisition of additional brands
through joint venture arrangements. While we own a controlling interest in our
Gosling-Castle Partners strategic export venture, we may not have the majority
interest in, or control of, future joint ventures that we may enter into. There
is, therefore, risk that our joint venture partners may at any time have
economic, business or legal interests or goals that are inconsistent with our
interests or goals or those of the joint venture. There is also risk that our
current or future joint venture partners may be unable to meet their economic or
other obligations and that we may be required to fulfill those obligations
alone.

Our
ability to grow through the acquisition of additional brands will also be
dependent upon the availability of capital to complete the necessary acquisition
arrangements. We intend to finance our brand acquisitions through a combination
of our available cash resources, bank borrowings and, in appropriate
circumstances, the further issuance of equity and/or debt securities. Acquiring
additional brands could have a significant effect on our financial position, and
could cause substantial fluctuations in our quarterly and yearly operating
results. Also, acquisitions could result in the recording of significant
goodwill and intangible assets on our financial statements, the amortization or
impairment of which would reduce reported earnings in subsequent
years.

Currency
exchange rate fluctuations and devaluations may have a significant adverse
effect on our revenues, sales and overall financial results.

For
fiscal 2010, non-U.S. operations accounted for approximately 14.9% of our
revenues. Therefore, gains and losses on the conversion of foreign payments into
U.S. dollars could cause fluctuations in our results of operations, and
fluctuating exchange rates could cause reduced revenues and/or gross margins
from non-U.S. dollar-denominated international sales. Also, for fiscal 2010,
Euro denominated sales accounted for approximately 11.1% of our total revenue,
so a substantial change in the rate of exchange between the U.S. dollar and the
Euro could have a significant adverse affect on our financial results. Our
ability to acquire spirits and wine and produce and sell our products at
favorable prices will also depend in part on the relative strength of the U.S.
dollar. We may not be able to hedge against these risks.

We
must maintain a relatively large inventory of our products to support customer
delivery requirements, and if this inventory is lost due to theft, fire or other
damage or becomes obsolete, our results of operations would be negatively
impacted.

We
must maintain relatively large inventories to meet customer delivery
requirements for our products. We are always at risk of loss of that inventory
due to theft, fire or other damage, and any such loss, whether insured against
or not, could cause us to fail to meet our orders and harm our sales and
operating results. Also, our inventory may become obsolete as we introduce new
products, cease to produce old products or modify the design of our products’
packaging, which would increase our operating losses and negatively impact our
results of operations.

14

Either
our or our strategic partners’ failure to protect our respective trademarks,
service marks and trade secrets could compromise our competitive position and
decrease the value of our brand portfolio.

Our
business and prospects depend in part on our, and with respect to our agency or
joint venture brands, our strategic partners’, ability to develop favorable
consumer recognition of our brands and trademarks. Although both we and our
strategic partners actively apply for registration of our brands and trademarks,
they could be imitated in ways that we cannot prevent. Also, we rely on trade
secrets and proprietary know-how, concepts and formulas. Our methods of
protecting this information may not be adequate. Moreover, we may face claims of
misappropriation or infringement of third parties’ rights that could interfere
with our use of this information. Defending these claims may be costly and, if
unsuccessful, may prevent us from continuing to use this proprietary information
in the future and result in a judgment or monetary damages being levied against
us. We do not maintain non-competition agreements with all of our key personnel
or with some of our key suppliers. If competitors independently develop or
otherwise obtain access to our or our strategic partners’ trade secrets,
proprietary know-how or recipes, the appeal, and thus the value, of our brand
portfolio could be reduced, negatively impacting our sales and growth
potential.

Risks
Related to Our Industry

Adverse
public opinion about alcohol could reduce demand for our products.

Anti-alcohol
groups have, in the past, advocated successfully for more stringent labeling
requirements, higher taxes and other regulations designed to discourage alcohol
consumption. More restrictive regulations, negative publicity regarding alcohol
consumption and/or changes in consumer perceptions of the relative healthfulness
or safety of beverage alcohol could decrease sales and consumption of alcohol
and thus the demand for our products. This could, in turn, significantly
decrease both our revenues and our revenue growth, causing a decline in our
results of operations.

Class
action or other litigation relating to alcohol abuse or the misuse of alcohol
could adversely affect our business.

Our
industry faces the possibility of class action or similar litigation alleging
that the continued excessive use or abuse of beverage alcohol has caused death
or serious health problems. It is also possible that governments could assert
that the use of alcohol has significantly increased government funded health
care costs. Litigation or assertions of this type have adversely affected
companies in the tobacco industry, and it is possible that we, as well as our
suppliers, could be named in litigation of this type.

Also,
lawsuits have been brought in a number of states alleging that beer and spirits
manufacturers have improperly targeted underage consumers in their advertising.
Plaintiffs in these cases allege that the defendants’ advertisements, marketing
and promotions violate the consumer protection or deceptive trade practices
statutes in each of these states and seek repayment of the family funds expended
by the underage consumers. While we have not been named in these lawsuits, it is
possible we could be named in similar lawsuits in the future. Any class action
or other litigation asserted against us could be expensive and time consuming to
defend against, depleting our cash and diverting our personnel resources and, if
the plaintiffs in such actions were to prevail, our business could be harmed
significantly.

Our
business is subject to extensive regulation in all of the countries in which we
operate. This may include regulations regarding production, distribution,
marketing, advertising and labeling of beverage alcohol products. We are
required to comply with these regulations and to maintain various permits and
licenses. We are also required to conduct business only with holders of licenses
to import, warehouse, transport, distribute and sell beverage-alcohol products.
We cannot assure you that these and other governmental regulations applicable to
our industry will not change or become more stringent. Moreover, because these
laws and regulations are subject to interpretation, we may not be able to
predict when and to what extent liability may arise. Additionally, due to
increasing public concern over alcohol-related societal problems, including
driving while intoxicated, underage drinking, alcoholism and health consequences
from the abuse of alcohol, various levels of government may seek to impose
additional restrictions or limits on advertising or other marketing activities
promoting beverage alcohol products. Failure to comply with any of the current
or future regulations and requirements relating to our industry and products
could result in monetary penalties, suspension or even revocation of our
licenses and permits. Costs of compliance with changes in regulations could be
significant and could harm our business, as we could find it necessary to raise
our prices in order to maintain profit margins, which could lower the demand for
our products and reduce our sales and profit potential.

15

Also,
the distribution of beverage alcohol products is subject to extensive taxation
both in the United States and internationally (and, in the United States, at
both the federal and state government levels), and beverage alcohol products
themselves are the subject of national import and excise duties in most
countries around the world. An increase in taxation or in import or excise
duties could also significantly harm our sales revenue and margins, both through
the reduction of overall consumption and by encouraging consumers to switch to
lower-taxed categories of beverage alcohol.

We
could face product liability or other related liabilities that increase our
costs of operations and harm our reputation.

Although
we maintain liability insurance and will attempt to limit contractually our
liability for damages arising from our products, these measures may not be
sufficient for us to successfully avoid or limit liability. Our product
liability insurance coverage is limited to $1.0 million per occurrence and
$2.0 million in the aggregate and our general liability umbrella policy is
capped at $10.0 million. Further, any contractual indemnification and
insurance coverage we have from parties supplying our products is limited, as a
practical matter, to the creditworthiness of the indemnifying party and the
insured limits of any insurance provided by these suppliers. In any event,
extensive product liability claims could be costly to defend and/or costly to
resolve and could harm our reputation.

Contamination
of our products and/or counterfeit or confusingly similar products could harm
the image and integrity of, or decrease customer support for, our brands and
decrease our sales.

The
success of our brands depends upon the positive image that consumers have of
them. Contamination, whether arising accidentally or through deliberate
third-party action, or other events that harm the integrity or consumer support
for our brands, could affect the demand for our products. Contaminants in raw
materials purchased from third parties and used in the production of our
products or defects in the distillation and fermentation processes could lead to
low beverage quality as well as illness among, or injury to, consumers of our
products and could result in reduced sales of the affected brand or all of our
brands. Also, to the extent that third parties sell products that are either
counterfeit versions of our brands or brands that look like our brands,
consumers of our brands could confuse our products with products that they
consider inferior. This could cause them to refrain from purchasing our brands
in the future and in turn could impair our brand equity and adversely affect our
sales and operations.

Risk
Relating to Owning Our Stock

We
may not be able to maintain our listing on the NYSE Amex, which may limit the
ability of our shareholders to sell their common stock.

If
we do not meet the NYSE Amex continued listing criteria, we may be delisted and
trading of our common stock could be conducted in the Over-the-Counter Bulletin
Board or the Pink Sheets. In such case, a shareholder likely would find it more
difficult to trade our common stock or to obtain accurate market quotations for
it. If our common stock is delisted, it will become subject to the Securities
and Exchange Commission’s “penny stock rules,” which impose sales practice
requirements on broker-dealers that sell that common stock to persons other than
established customers and “accredited investors.” Application of this rule could
make broker-dealers unable or unwilling to sell our common stock and limit the
ability of shareholders to sell their common stock in the secondary
market.

Our
executive officers, directors and principal shareholders own a substantial
percentage of our voting stock, which allows them to control matters requiring
shareholder approval. They could make business decisions for us that cause our
stock price to decline and may act by written consent.

As
of June 28, 2010, our executive officers, directors and principal shareholders
beneficially owned approximately 74% of our common stock, including warrants and
options that are exercisable within 60 days of the date of this annual
report. As a result, if they act in concert, they could control matters
requiring approval by our shareholders, including the election of directors, and
could have the ability to prevent or cause a corporate transaction, even if
other shareholders oppose such action. Also, our charter permits our
shareholders to act by written consent. This concentration of voting power could
also have the effect of delaying, deterring, or preventing a change of control
or other business combination, which could cause our stock price to
decline.

Provisions
in our articles of incorporation, our bylaws and Florida law could make it more
difficult for a third party to acquire us, discourage a takeover and adversely
affect existing shareholders.

Our
articles of incorporation, our bylaws and the Florida Business Corporation Act
contain provisions that may have the effect of making more difficult, delaying,
or deterring attempts by others to obtain control of our company, even when
these attempts may be in the best interests of our shareholders. These include
provisions limiting the shareholders’ powers to remove directors. Our articles
of incorporation also authorize our board of directors, without shareholder
approval, to issue one or more series of preferred stock, which could have
voting and conversion rights that adversely affect or dilute the voting power of
the holders of our common stock. Florida law also imposes conditions on certain
"affiliated transactions” with “interested shareholders.”

16

These
provisions and others that could be adopted in the future could deter
unsolicited takeovers or delay or prevent changes in our control or management,
including transactions in which shareholders might otherwise receive a premium
for their shares over then current market prices. These provisions may also
limit the ability of shareholders to approve transactions that they may deem to
be in their best interests.

Item 1B.
Unresolved Staff Comments.

Not
applicable.

Item 2.
Properties

Our
executive offices are located in New York, NY, where we lease approximately
4,800 square feet of office space under a lease that expires in April 2012.
We also lease approximately 750 square feet of office space in Dublin, Ireland
under a lease that expires in December 2013 and approximately 1,000 square
feet of office space in Houston, TX under a lease that expires in January
2011.

Item 3.
Legal Proceedings

We
believe that neither we nor any of our wholly-owned subsidiaries is currently
subject to litigation which, in the opinion of our management, is likely to have
a material adverse effect on us.

We
may, however, become involved in litigation from time to time relating to claims
arising in the ordinary course of our business. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.

Our
common stock trades on the NYSE Amex under the symbol “ROX.” The following table
sets forth the high and low closing prices for our common stock for the periods
specified.

Fiscal
2010

High

Low

First
Quarter (April 1 — June 30, 2009)

$

0.28

$

0.19

Second
Quarter (July 1 — September 30, 2009)

$

0.46

$

0.20

Third
Quarter (October 1 — December 31, 2009)

$

0.47

$

0.27

Fourth
Quarter (January 1 — March 31, 2010)

$

0.34

$

0.24

Fiscal
2009

First
Quarter (April 1 — June 30, 2008)

$

1.00

$

0.17

Second
Quarter (July 1 — September 30, 2008)

$

0.36

$

0.16

Third
Quarter (October 1 — December 31, 2008)

$

0.43

$

0.17

Fourth
Quarter (January 1 — March 31, 2009)

$

0.29

$

0.17

Holders

At
June 24, 2010, there were approximately 163 record holders of our common
stock.

Dividend
policy

We
did not declare or pay any cash dividends in fiscal 2010 or 2009 and we do not
intend to pay any cash dividends with respect to our common stock in the
foreseeable future. We currently intend to retain any earnings for use in the
operation of our business and to fund future growth. Also, our credit agreement
restricts the declaration of dividends on our common stock. Any future
determination to pay cash dividends will be at our board’s discretion and will
depend upon our financial condition, operating results, capital requirements and
such other factors as our board deems relevant.

Equity
Compensation Plan Information

The
following table sets forth information at March 31, 2010 regarding
compensation plans under which our equity securities are authorized for
issuance.

Plan category

Number of securities

to be issued upon

exercise of

outstanding options,

warrants, restricted

stock and rights

Weighted-average

exercise price of

outstanding

options, warrants,

restricted stock and

rights

Number of securities

remaining available

for future issuance

under equity

compensation plans

Equity
compensation plans approved by security holders

5,685,286

$

3.08

8,331,528

Equity
compensation plans not approved by security holders

—

—

—

Total

5,685,286

$

3.08

8,331,528

Item 6.
Selected Financial Data

As
a smaller reporting company, we are not required to provide the information
required by this Item.

18

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations

Overview

We
develop and market premium and super-premium brands in the following beverage
alcohol categories: rum, whiskey, liqueurs, vodka, tequila and fine wine. We
distribute our products in all 50 U.S. states and the District of Columbia, in
twelve primary international markets, including Ireland, Great Britain, Northern
Ireland, Germany, Canada, Bulgaria, France, Russia, Finland, Norway, Sweden,
China and the Duty Free markets, and in a number of other countries in
continental Europe and Latin America. We market the following brands, among
others, Gosling’s Rum®,
Jefferson’sTM,
Jefferson’s Reserve® and
Jefferson’sTM
Presidential Select bourbons, Clontarf® Irish
whiskey, Pallini®
liqueurs, Boru® vodka,
Knappogue Castle Whiskey®,
TierrasTM tequila
and Betts & SchollTM
wines.

Our
objective is to continue building a distinctive portfolio of global premium and
super-premium spirits and wine brands. We have shifted our focus from a
volume-oriented approach to a profit-centric focus. To achieve this, we continue
to seek to:

•

increase
revenues from existing brands. We are focusing our existing
distribution relationships, sales expertise and targeted marketing
activities to concentrate on our more profitable brands by expanding our
domestic and international distribution relationships to increase the
mutual benefits of concentrating on our most profitable brands, while
continuing to achieve brand recognition and growth and gain additional
market share for our brands within retail stores, bars and restaurants,
and thereby with end consumers;

•

improve
value chain and manage cost structure. We have undergone a
comprehensive review and analysis of our supply chain and cost structure
both on a company-wide and brand-by-brand basis. This has included
restructurings and personnel reductions throughout our company. We further
intend to map, analyze and redesign our purchasing and supply systems to
reduce costs in our current operations and achieve profitability in future
operations;

•

selectively
add new premium brands to our portfolio. We intend to continue
developing new brands and pursuing strategic relationships, joint ventures
and acquisitions to selectively expand our premium spirits and wine
portfolio, particularly by capitalizing on and expanding our already
demonstrated partnering capabilities. Our criteria for new brands focuses
on underserved areas of the beverage alcohol marketplace, while examining
the potential for direct financial contribution to our company and the
potential for future growth based on development and maturation of agency
brands. We will evaluate future acquisitions and agency relationships on
the basis of their potential to be immediately accretive and their
potential contributions to our objectives of becoming profitable and
further expanding our product offerings. We expect that future
acquisitions, if consummated, would involve some combination of cash, debt
and the issuance of our stock; and

•

cost
containment. We have taken significant steps to reduce our costs,
which has resulted in a significant decrease in selling expense and
general and administrative expense. These steps included: reducing staff
in our U.S. and international operations; restructuring our international
distribution system; changing distributor relationships in certain
markets; restructuring the Gosling-Castle Partners, Inc. working
relationship; moving production of certain products to a lower cost
facility in the U.S.; and reducing general and administrative costs,
including professional fees, insurance, occupancy and other overhead
costs. Efforts to reduce expenses further
continue.

Recent
developments

Betts
& Scholl Acquisition

In September 2009,
we acquired the assets of Betts & Scholl LLC, a premium wine maker formed in
2003 by Master Sommelier Richard Betts and Dennis Scholl. In the transaction, we
issued to the sellers a total of 7.14 million shares of our common stock
and approximately $1.1 million of notes, of which $0.3 million was
paid at closing. Dennis Scholl has joined our Board of Directors, where he
serves as an independent director, and Richard Betts has joined us as a Vice
President and head of our newly-formed Fine Wine Division.

The Fine
Wine Division has been created to market and sell a select portfolio of premium
wines from around the world. As part of our fine wine strategy, we seek to
recruit and represent the wines of a small number of premium, like-minded brand
owners and wineries. The goal is to establish enough high quality wine
expressions to provide a reasonable offering to customers. At the same time,
however, we expect to limit the number of brands so each brand receives the
attention it deserves. The division will take advantage of our existing
infrastructure, including our distribution system. In June 2010, we entered into
an agreement with Grand Cru Selections, a New York City fine wine distributor,
under which we will act as U.S. importer and marketer for Cerbaie Brunello di
Montalcino and Grand Cru will act as a wholesaler in New York and New Jersey for
a select range of our fine wines.

Bourbon
Purchase

In
December 2009, we acquired a rare stock of aged bourbon which will supply
our currently forecasted supply needs for Jefferson’s and Jefferson’s Reserve
very small batch Kentucky bourbons. To concentrate our efforts on the
Jefferson’s bourbons, which have experienced double digit growth during the past
year, we divested our Sam Houston bourbon brand and existing inventory for
$0.5 million in cash. We expect the bourbon category to be an area for
continued growth. We believe that the Jefferson’s brand has strong potential to
develop an avid following among bourbon connoisseurs.

Reincorporation

Effective
as of February 9, 2010, we completed a reincorporation transaction under which
Castle Brands Inc., a Delaware corporation (“Castle Delaware”), merged with and
into Castle Brands (Florida) Inc., a Florida corporation and wholly-owned
subsidiary of Castle Delaware (“Castle Florida”), with Castle Florida being the
surviving entity and being renamed Castle Brands Inc. As a result of the
reincorporation, the legal domicile of the surviving entity is now the State of
Florida. In the reincorporation, each outstanding share of Castle
Delaware common stock, par value $0.01 per share, was converted into one share
of Castle Florida common stock, par value $0.01 per share.

Credit
Facility

In
December 2009, we entered into a $2.5 million revolving credit
agreement (the “Credit Agreement”) with, among others, Frost Gamma Investments
Trust, Vector Group Ltd., a principal shareholder of ours, Lafferty Ltd., a
principal shareholder of ours, IVC Investors, LLLP, an entity affiliated with
Glenn Halpryn, a director of ours, Mark Andrews, our Chairman, and Richard J.
Lampen, our President and Chief Executive Officer. Under the Credit Agreement,
we may borrow from time to time up to $2.5 million to be used for working
capital or general corporate purposes. Borrowings under the Credit Agreement
mature on April 1, 2013 and bear interest at a rate of 11% per annum,
payable quarterly. The Credit Agreement provides for the payment of an aggregate
commitment fee of $75,000 payable to the lenders over the three-year period.
Amounts may be repaid and reborrowed under the Credit Agreement without penalty.
In April 2010, we borrowed $1.0 million under this Credit Agreement. The note
issued under the Credit Agreement contains customary events of default, which if
uncured, entitle the holders to accelerate the due date of the unpaid principal
amount of, and all accrued and unpaid interest on, such note. The note is
secured by $7.4 million of inventory and $4.4 million in trade accounts
receivable of Castle Brands (USA) Corp., our wholly-owned subsidiary, which we
refer to as CB-USA, under a security agreement.

Promissory Note

In June
2010, we issued a $2.0 million promissory note to Frost Gamma Investments Trust,
an entity affiliated with Phillip Frost, M.D., a director and principal
shareholder of ours (“Frost Note”). Borrowings under the Frost Note mature on
June 21, 2012 and bear interest at a rate of 11% per annum. Interest is accrued
quarterly and due at maturity. The Frost Note may be prepaid in whole or in part
at any time prior to maturity without penalty, but with payment of accrued
interest to the date of prepayment. The Frost Note does not contain any
financial covenants.

Share
Repurchase

In June
2010, we repurchased 3,790,562 shares of our common stock at a price of $0.27
per share in a privately-negotiated transaction. Also, our board of directors
approved a stock repurchase program authorizing us to buy up to an additional
2.5 million shares of our common stock.

19

Operations
overview

We
generate revenue through the sale of our products to our network of wholesale
distributors or, in control states, state-owned agencies, which, in turn,
distribute our brands to retail outlets. In the U.S., our sales price per case
includes excise tax and import duties, which are also reflected in a
corresponding increase in our cost of sales. Most of our international sales are
sold “in bond”, with the excise taxes paid by our customers upon shipment,
thereby resulting in lower relative revenue as well as a lower relative cost of
sales, although some of our United Kingdom sales are sold “tax paid”, as in the
United States. The difference between sales and net sales principally reflects
adjustments for various distributor incentives.

Our
gross profit is determined by the prices at which we sell our products, our
ability to control our cost of sales, the relative mix of our case sales by
brand and geography and the impact of foreign currency fluctuations. Our cost of
sales is principally driven by our cost of procurement, bottling and packaging,
which differs by brand, as well as freight and warehousing costs. We purchase
certain products, such as the Gosling’s rums, Pallini liqueurs and Tierras
tequila, as finished goods. For other products, such as the Boru Vodkas, we
purchase the components, including the distilled spirits, bottles and packaging
materials, and have arrangements with third parties for bottling and packaging.
Our U.S. sales typically have a higher absolute gross margin than in other
markets, as sales prices per case are generally higher in the U.S. than
elsewhere.

Selling
expense principally includes advertising and marketing expenditures and
compensation paid to our marketing and sales personnel. Our selling expense, as
a percentage of sales and per case, is higher than that of our competitors
because of our brand development costs, level of marketing expenditures and
established sales force versus our relatively small base of case sales and sales
volumes. However, we believe that maintaining an infrastructure capable of
supporting future growth is the correct long-term approach for us.

While
we expect the absolute level of selling expense to increase in the coming years,
we expect selling expense as a percentage of revenues and on a per case basis to
decline, as our volumes expand and our sales team sells a larger number of
brands.

General
and administrative expense relates to corporate and administrative functions
that support our operations and includes administrative payroll, occupancy and
related expenses and professional services. We expect general and administrative
expense in fiscal 2011 to be comparable to fiscal 2010, as we continue to
control core spending. We expect our general and administrative expense as a
percentage of sales to decline due to economies of scale.

We
expect to increase our case sales in the U.S. and internationally over the next
several years through organic growth, and through the extension of our product
line via line extensions, acquisitions and distribution agreements. We will seek
to maintain liquidity and manage our working capital and overall capital
resources during this period of anticipated growth to achieve our long-term
objectives, although there is no assurance that we will be able to do
so.

We
continue to believe the following industry trends will create growth
opportunities for us, including:

•

the divestiture of smaller and
emerging non-core brands by major spirits companies as they continue to
consolidate;

•

increased barriers to entry,
particularly in the U.S., due to continued consolidation and the
difficulty in establishing an extensive distribution network, such as the
one we maintain;

•

the trend by small private and
family-owned spirits brand owners to partner with, or be acquired by, a
company with global distribution. We expect to be an attractive
alternative to our larger competitors for these brand owners as one of the
few modestly-sized publicly-traded spirits companies;
and

•

growth in the non-spirits
segments of the beverage alcohol industry, particularly wine, which may
allow us to grow our portfolio and leverage our distribution
network.

Our
growth strategy is based upon partnering with other brands, acquiring smaller
and emerging brands and growing existing brands. To identify potential partner
and acquisition candidates we plan to rely on our management’s industry
experience and our extensive network of industry contacts. We also plan to
maintain and grow our U.S. and international distribution channels so that we
are more attractive to spirits companies who are looking for a route to market
for their products. With respect to foreign and small private and family-owned
spirits brands, we will continue to be flexible and creative in the structure
and form of our proposals and present an alternative to the larger spirits
companies.

We
intend to finance our brand acquisitions through a combination of our available
cash resources, bank borrowings and, in appropriate circumstances, the further
issuance of equity and/or debt securities. Acquiring additional brands could
have a significant effect on our financial position, and could cause substantial
fluctuations in our quarterly and yearly operating results. Additionally, the
pursuit of acquisitions and other new business relationships may require
significant management attention. We may not be able to successfully identify
attractive acquisition candidates, obtain financing on favorable terms or
complete these types of transactions in a timely manner and on terms acceptable
to us, if at all.

20

Financial
performance overview

The
following table provides information regarding our case sales for the periods
presented based on nine-liter equivalent cases, which is a standard industry
metric.

Years ended March 31,

2010

2009

Cases

United
States

217,938

206,532

International

68,248

83,806

Total

286,186

290,338

Rum

95,271

89,126

Vodka

92,012

104,771

Liqueurs

59,944

58,563

Whiskey

35,541

37,364

Tequila

2,104

514

Wine

1,314

—

Total

286,186

290,338

Percentage
of Cases

United
States

76.2

%

71.1

%

International

23.8

%

28.9

%

Total

100.0

%

100.0

%

Rum

33.3

%

30.7

%

Vodka

32.2

%

36.1

%

Liqueurs

20.9

%

20.2

%

Whiskey

12.4

%

12.8

%

Tequila

0.7

%

0.2

%

Wine

0.5

%

0.0

%

Total

100.0

%

100.0

%

Critical
accounting policies and estimates

A
number of estimates and assumptions affect our reported amounts of assets and
liabilities, amounts of sales and expenses and disclosure of contingent assets
and liabilities in our financial statements. On an ongoing basis, we evaluate
these estimates and assumptions based on historical experience and other factors
and circumstances. We believe our estimates and assumptions are reasonable under
the circumstances; however, actual results may differ from these
estimates.

We
believe that the estimates and assumptions discussed below are most important to
the portrayal of our financial condition and results of operations in that they
require our most difficult, subjective or complex judgments and form the basis
for the accounting policies deemed to be most critical to our
operations.

Revenue
recognition

We
recognize revenue from product sales when the product is shipped to a customer
(generally a distributor), title and risk of loss has passed to the customer in
accordance with the terms of sale (FOB shipping point or FOB destination) and
collection is reasonably assured. We do not offer a right of return but will
accept returns if we shipped the wrong product or wrong quantity. Revenue is not
recognized on shipments to control states in the United States until such time
as product is sold through to the retail channel.

21

Accounts
receivable

We
record trade accounts receivable at net realizable value. This value includes an
appropriate allowance for estimated uncollectible accounts to reflect any loss
anticipated on the trade accounts receivable balances and charged to the
provision for doubtful accounts. We calculate this allowance based on our
history of write-offs, level of past due accounts based on contractual terms of
the receivables and our relationships with, and economic status of, our
customers.

Inventory
valuation

Our
inventory, which consists of distilled spirits, bulk wine, dry good raw
materials (bottles, labels and caps), packaging and finished goods, is valued at
the lower of cost or market, using the weighted average cost method. We assess
the valuation of our inventories and reduce the carrying value of those
inventories that are obsolete or in excess of our forecasted usage to their
estimated realizable value. We estimate the net realizable value of such
inventories based on analyses and assumptions including, but not limited to,
historical usage, future demand and market requirements. Reduction to the
carrying value of inventories is recorded in cost of goods sold.

Goodwill
and other intangible assets

As
of March 31, 2010, $1.0 of goodwill that arose from acquisitions was
recorded. No goodwill that arose from acquisitions was recorded as of
March 31, 2009. Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible and identifiable intangible
assets of businesses acquired. Intangible assets with indefinite lives consist
primarily of rights, trademarks, trade names and formulations. We are required
to analyze our goodwill and other intangible assets with indefinite lives for
impairment on an annual basis as well as when events and circumstances indicate
that an impairment may have occurred. Certain factors that may occur and
indicate that an impairment exists include, but are not limited to, operating
results that are lower than expected and adverse industry or market economic
trends. We evaluate the recoverability of goodwill and indefinite lived
intangible assets using a two-step impairment test approach at the reporting
unit level. In the first step the fair value for the reporting unit is compared
to its book value including goodwill. If the fair value of the reporting unit is
less than the book value, a second step is performed which compares the implied
fair value of the reporting unit’s goodwill to the book value of the goodwill.
The fair value for the goodwill is determined based on the difference between
the fair values of the reporting units and the net fair values of the
identifiable assets and liabilities of such reporting units. If the fair value
of the goodwill is less than the book value, the difference is recognized as an
impairment.

The
fair value of each reporting unit was determined at each of March 31, 2010
and 2009 by weighting a combination of the present value of our discounted
anticipated future operating cash flows and values based on market multiples of
revenue and earnings before interest, taxes, depreciation and amortization
(“EBITDA”) of comparable companies. We did not record an impairment on goodwill
or other intangible assets for fiscal 2010. The valuations resulted in us
recording a goodwill impairment of approximately $3.8 million and an
impairment on other intangible assets of $1.1 million for fiscal
2009.

Intangible
assets with estimable useful lives are amortized over their respective estimated
useful lives to the estimated residual values and reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. We are required to amortize intangible assets with estimable
useful lives over their respective estimated useful lives to the estimated
residual values and to review intangible assets with estimable useful lives for
impairment in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 310, “Accounting for the Impairment or
Disposal of Long-lived Assets.”

Stock-based
awards

We
follow current authoritative guidance regarding stock-based compensation, which
requires all share-based payments, including grants of stock options, to be
recognized in the income statement as an operating expense, based on their fair
values on the date of grant. Stock based compensation for fiscal 2010 and 2009
was $0.2 million and $1.7 million, respectively. We used the Black-Scholes
option-pricing model to estimate the fair value of options granted. The
assumptions used in valuing the options granted during fiscal 2010 and 2009 are
included in note 13 to our consolidated financial statements.

Fair
value of financial instruments

ASC
825, “Financial Instruments” (“ASC 825”), defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties and requires disclosure of the fair value of
certain financial instruments. We believe that there is no material difference
between the fair value and the reported amounts of financial instruments in the
balance sheets due to the short-term maturity of these instruments, or with
respect to the debt, as compared to the current borrowing rates available to us.
Further, our investments have been classified within Level 1 of ASC 825 and are
reported at fair value.

22

Results
of operations

The
following table sets forth, for the periods indicated, the percentage of net
sales of certain items in our consolidated financial statements.

Years ended March 31,

2010

2009

Sales,
net

100.0

%

100.0

%

Cost
of sales

63.7

%

68.4

%

Gross
profit

36.3

%

31.6

%

Selling
expense

33.6

%

51.4

%

General
and administrative expense

19.7

%

35.4

%

Depreciation
and amortization

3.2

%

5.0

%

Goodwill
and other intangible asset impairment

0.0

%

18.5

%

Loss
from operations

(20.2

)%

(78.7

)%

Other
income

0.0

%

0.1

%

Other
expense

(0.2

)%

(0.2

)%

Foreign
exchange gain (loss)

7.4

%

(15.8

)%

Interest
income (expense), net

0.1

%

(6.0

)%

Gain
on exchange of note payable

0.9

%

16.0

%

Gain
on sale of intangible asset

1.4

%

0.0

%

Income
tax benefit

0.5

%

0.6

%

Net
loss

(10.1

)%

(84.0

)%

Net
(income) loss attributable to noncontrolling interests

(0.0

)%

0.9

%

Net
loss attributable to common shareholders

(10.1

)%

(83.1

)%

Fiscal
2010 compared with fiscal 2009

Net sales. Net sales
increased 9.1% to $28.5 million for the year ended March 31, 2010, as
compared to $26.1 million for the prior-year period. Our U.S. case sales as a
percentage of total case sales increased to 76.2% for the year ended March 31,
2010, as compared to 71.1% for the prior-year period. U.S. net sales increased
to $24.3 million for the year ended March 31, 2010 from $20.5 million
for the comparable prior-year period, including $0.6 million in revenue
from sales of Tierras tequila, $0.6 million in revenue from sales of
Jefferson’s Presidential Select bourbon and $0.4 million in revenue from
sales of our Betts & Scholl wines. The growth in U.S. sales reflects the
momentum of most of our portfolio in the U.S., particularly for our Gosling’s
rums, Jefferson’s bourbons and certain liqueurs, including Brady’s Irish Cream
and Pallini Limoncello.

The
table below presents the increase or decrease, as applicable, in case sales by
product category for the year ended March 31, 2010 as compared to the year ended
March 31, 2009:

Gross profit. Gross
profit increased 25.1% to $10.3 million for the year ended March 31, 2010,
from $8.3 million for the prior-year period, while our gross margin
increased to 36.4% for the year ended March 31, 2010 compared to 31.6% for the
prior-year period. During the year ended March 31, 2010 and 2009, we recorded
reversals of our allowance for obsolete and slow moving inventory of
$0.7 million and $0.4 million, respectively. We recorded these
reversals because we were able to sell certain goods included in the allowance
recorded during previous fiscal years. We recorded the reversals as a decrease
in cost of sales. Absent the reversals of the allowance, our gross profit was
$9.7 million and $7.9 million for each of the years ended March 31,
2010 and 2009, and our gross margin was 34.0% and 30.3%,
respectively.

Selling expense.
Selling expense decreased 28.7% to $9.6 million for the year ended March 31,
2010 from $13.4 million for the prior-year period. This decrease in selling
expense was attributable to our continued cost containment efforts, including a
decrease in advertising, marketing and promotion expense of $1.9 million for the
year ended March 31, 2010 compared to the prior-year period. We also reduced
sales and marketing staff in both our domestic and international operations,
resulting in a decrease of employee expense, including salaries, related
benefits and travel and entertainment, of $2.4 million for the year ended March
31, 2010 compared to the prior-year period, which prior-year period included
$0.4 million in severance charges and $0.5 million in stock-based compensation
expense. As a result of our continued cost containment efforts, selling expense
as a percentage of net sales decreased to 33.6% for the year ended March 31,
2010 as compared to 51.4% for the comparable prior-year period

General and administrative
expense. General and administrative expense decreased 39.0% to $5.6
million for the year ended March 31, 2010 as compared to $9.2 million for the
prior-year period. General and administrative staff reductions resulted in a
decrease of employee expense, including salaries, related benefits and travel
and entertainment, of $3.0 million for the year ended March 31, 2010 against the
prior-year period, which prior-year period included $1.0 million in severance
charges and $0.7 million in stock-based compensation expense. A decrease of $0.3
million in professional fees and decreases of $0.2 million in occupancy and $0.2
million in insurance expense, respectively, were due to our ongoing cost
containment efforts. As a result, general and administrative expense as a
percentage of net sales decreased to 19.7% for the year ended March 31, 2010 as
compared to 35.4% for the prior-year period.

Depreciation and
amortization. Depreciation and amortization decreased 29.5% to $0.9
million for fiscal 2010 from $1.3 million for fiscal 2009 due to a $0.3 million
charge to fiscal 2009 expense from a change in the estimated useful life of our
supply agreement with The Carbery Group Ltd. as described in note 7 to our
consolidated financial statements.

Goodwill and other intangible
asset impairment. Under ASC 350, “Intangibles - Goodwill and Other”, the
fair value of each of our reporting units was determined at March 31, 2010 and
2009 by weighting a combination of the present value of our discounted
anticipated future operating cash flows and values based on EBITDA of comparable
companies. We did not record an impairment on goodwill and other intangible
assets for fiscal 2010. The valuations resulted in a goodwill impairment of
approximately $3.8 million and an impairment on other intangible assets of $1.1
million for fiscal 2009.

Loss from operations.
As a result of the foregoing, our loss from operations improved $14.7 million,
or 71.8%, to $5.8 million for the year ended March 31, 2010 from $20.5 million
for the prior-year period. As a result of our continued cost containment
efforts, our focus on our more profitable brands and markets, and expected
organic growth of our brands, we anticipate continued improved results of
operations in the near term as compared to prior-year periods, although there is
no assurance that we will attain such results.

Foreign exchange gain
(loss). Foreign exchange gain for the year ended March 31, 2010 was $2.1
million as compared to a loss of $4.1 million for the year ended March 31, 2009
due to the weakening of the U.S. dollar against the Euro and the British Pound
and its effect on our Euro- and British Pound-denominated intercompany advances
to our foreign subsidiaries. In November 2009, to improve the liquidity of our
foreign subsidiaries, we converted our intercompany balances into an additional
investment in these subsidiaries. Beginning December 1, 2009, the translation
gain or loss from the restatement of the investments in our foreign subsidiaries
is included in other comprehensive income. Prior to this conversion, we
considered these transactions to be trading balances and short-term funding
subject to transaction adjustment under ASC 830, "Foreign Currency Matters". As
such, at each balance sheet date, we restated the Euro denominated intercompany
balances included on the books of the foreign subsidiaries in U.S. Dollars at
the exchange rate in effect at the balance sheet date, with the resulting
foreign currency transaction gain or loss included in net loss.

Interest income (expense),
net. We had interest income, net of $0.02 million for the fiscal 2010 as
compared to interest expense, net of $1.6 million for fiscal 2009. We eliminated
this expense by converting and exchanging all of our senior notes and
convertible subordinated notes for equity during fiscal 2009 and fiscal 2010. In
December 2009, we entered into a $2.5 million revolving credit agreement as
described below in “Liquidity and Capital Resources.” We anticipate that from
time to time over the next three years we may borrow up to the full limit of our
credit facility to fund operations, inventory requirements and potential
acquisition opportunities. These borrowings would result in additional interest
expense in future periods.

24

Gain on sale of intangible
asset. In November 2009, we sold our Sam Houston bourbon brand to a third
party for $0.5 million in cash. This sale resulted in a gain of $0.4
million.

Gain on exchange of note
payable. In May 2009, we exchanged our outstanding 3% note by issuing
common stock. This resulted in a pre-tax, non-cash gain of $0.3 million for the
year ended March 31, 2010. In October 2008, we exchanged our outstanding 6%
convertible subordinated notes by issuing common stock. This resulted in a
pre-tax, non-cash gain of $4.2 million for the year ended March 31,
2009.

Net (income) loss attributable
to noncontrolling interests. As described in Note 1W to our accompanying
consolidated financial statements, we have separately presented “Net (income)
loss attributable to noncontrolling interests” on the accompanying consolidated
statements of operations. Net (income) loss attributable to noncontrolling
interests during the year ended March 31, 2010 amounted to a loss of ($0.01)
million as compared to income of $0.2 million for the prior-year period, both
the result of allocated net results recorded by our 60%-owned subsidiary,
Gosling-Castle Partners, Inc.

Net loss attributable to
common shareholders. As a result of the net effects of the foregoing, net
loss attributable to common shareholders for the year ended March 31, 2010
improved 86.8% to a loss of $2.9 million from $21.7 million for the year ended
March 31, 2009. Net loss per common share, basic and diluted, was $0.03 per
share for the year ended March 31, 2010 as compared to $0.68 per share for the
prior-year period. Net loss per common share basic and diluted was positively
affected by the increase in common shares outstanding resulting from the common
stock issued in connection with the fiscal 2009 series A preferred stock
transaction and the fiscal 2010 Betts & Scholl, LLC
acquisition.

Potential
fluctuations in quarterly results and seasonality

Our industry is subject to seasonality with peak sales in each major category
generally occurring in the fourth calendar quarter, which is our third fiscal
quarter. This holiday demand typically results in slightly higher sales for us
in our second and/or third fiscal quarters.

Liquidity
and capital resources

Since our inception, we have incurred significant operating and net losses and
have not generated positive cash flows from operations. For the year ended March
31, 2010, we had a net loss of $2.9 million, and used cash of $6.1 million in
operating activities. As of March 31, 2010, we had an accumulated deficit of
$112.1 million.

In
June 2010, we issued the $2.0 million Frost Note. Borrowings and under the
Frost Note mature on June 21, 2012 and bear interest at a rate of 11% per annum.
Interest is accrued quarterly and due at maturity. The Frost Note may be prepaid
in whole or in part at any time prior to maturity without penalty, but with
payment of accrued interest to the date of prepayment. The Frost Note does not
contain any financial covenants.

In
December 2009, we entered into the $2.5 million Credit Agreement. Under the
Credit Agreement, we may borrow from time to time up to $2.5 million to be used
for working capital or general corporate purposes. Borrowings under the
Credit Agreement mature on April 1, 2013 and bear interest at a rate of 11% per
annum, payable quarterly. The Credit Agreement provides for the payment of an
aggregate commitment fee of $75,000 payable to the lenders over the three-year
period. Amounts may be repaid and reborrowed under the Credit Agreement
without penalty. The note issued under the Credit Agreement contains
customary events of default, which if uncured, entitle the holders to accelerate
the due date of the unpaid principal amount of, and all accrued and unpaid
interest on, such note. The note is secured by $7.4 million of inventory
and $4.4 million in trade accounts receivable of CB-USA under a security
agreement. In April 2010, we borrowed $1.0 million under this Credit
Agreement.

25

In
October 2008, we completed a $15.0 million private placement of our series A
preferred stock with certain investors. In connection with the transaction,
substantially all of the holders of CB-USA’s 9% senior secured notes, in the
principal amount of $9.7 million plus accrued but unpaid interest, and all
holders of our 6% convertible notes, in the principal amount of $9.0 million
plus accrued but unpaid interest, converted their notes into shares of series A
preferred stock. Each share of series A preferred stock automatically converted
into common stock, as set forth in the certificate of designation of the series
A preferred stock, when we amended our charter in the last quarter of fiscal
2009. In May 2009, we exchanged the remaining 9% senior secured notes, which had
been amended so that, among other things, the interest rate was reduced to 3%,
payable at maturity, in the principal amount of $0.3 million, plus accrued but
unpaid interest of $14,275, for 200,000 shares of our common stock.

In
connection with the September 2009 Betts & Scholl acquisition, we issued a
secured promissory note in the aggregate principal amount of $1.1 million. The
note is secured under a security agreement by the Betts & Scholl inventory
acquired. The note provides for an initial payment of $0.3 million, paid at
closing, and for eight equal quarterly payments of principal and interest, with
the final payment due on September 21, 2011. Interest under the note accrues at
an annual rate of 0.84%, compounded quarterly. The note contains customary
events of default, which if uncured, entitle the holder to accelerate the due
date of the unpaid principal amount of, and all accrued and unpaid interest on,
the note.

In
December 2009, GCP issued a promissory note (the “GCP Note”) in the aggregate
principle amount of $0.2 million to Gosling's Export in exchange for credits
issued on certain inventory purchases. The GCP Note matures on April 1, 2020, is
payable at maturity, subject to certain acceleration events, and calls for
annual interest of 5%, to be accrued and paid at maturity. Interest has been
recorded retroactive to November 15, 2008.

Our current cash and working capital, the funds provided under the Frost Note
and the funds available to us under the Credit Agreement, should provide us with
sufficient funds to execute our planned operations for at least the next twelve
months. We anticipate that from time to time we may borrow up to the full limit
of our credit facility to fund operations, inventory requirements and potential
acquisition opportunities.

As
of March 31, 2010, we had shareholders’ equity of $22.7 million and working
capital of $11.3 million, compared to $26.0 million and $15.8 million,
respectively, as of March 31, 2009, primarily due to our total comprehensive
loss in fiscal 2010.

As
of March 31, 2010, we had cash and cash equivalents and short-term investments
of approximately $1.3 million, as compared to $7.7 million as of March 31, 2009.
The decrease is primarily attributable to the funding of our operations for the
year ended March 31, 2010. At March 31, 2010, we also had approximately $0.7
million of cash restricted from withdrawal and held by a bank in Ireland as
collateral for overdraft coverage, creditors’ insurance, revolving credit, and
other working capital purposes.

The following may result in a material decrease in our liquidity over the
near-to-mid term:

•

continued significant levels of
cash losses from operations;

•

an increase in working capital
requirements to finance higher levels of inventories and accounts
receivable;

•

our ability to maintain and
improve our relationships with our distributors and our routes to
market;

•

our ability to procure raw
materials at a favorable price to support our level of
sales;

•

potential acquisition of
additional brands; and

•

expansion into new markets and
within existing markets in the United States and
internationally.

Cash
flows

The following table summarizes our primary sources and uses of cash during the
periods presented:

Years ended March 31,

2010

2009

(in thousands)

Net
cash provided by (used in):

Operating
activities

$

(5,918

)

$

(10,863

)

Investing
activities

3,972

286

Financing
activities

(774

)

13,114

Effect
of foreign currency translation

(11

)

(77

)

Net
(decrease) increase in cash and cash equivalents

$

(2,731

)

$

2,460

26

Operating
activities. A substantial portion of available cash has been used to fund
our operating activities. In general, these cash funding requirements are based
on operating losses, driven chiefly by the inherent costs in developing and
maintaining our distribution system and our sales and marketing activities. We
have also utilized cash to fund our receivables and inventories. In general,
these cash outlays for receivables and inventories are only partially offset by
increases in our accounts payable to our suppliers and accrued
expenses.

On
average, the production cycle for our owned brands is up to three months from
the time we obtain the distilled spirits, bulk wine and other materials needed
to bottle and package our products to the time we receive products available for
sale, in part due to the international nature of our business. We do not produce
Gosling’s rums, Pallini liqueurs or Tierras tequila. Instead, we receive the
finished product directly from the owners of such brands. From the time we have
products available for sale, an additional two to three months may be required
before we sell our inventory and collect payment from customers.

During the year ended March 31, 2010, net cash used in operating activities was
$5.9 million, consisting primarily of a net loss of $2.9 million, the effects of
changes in foreign exchange of $2.4 million, a decrease in accounts payable and
accrued expenses of $1.7 million , a $0.7 million decrease in due to related
parties, a decrease in allowance for obsolete inventories of $0.6 million, a
gain on the sale of intangible assets of $0.4 million and a gain on the
conversion of debt of $0.3 million. These uses of cash were partially offset by
a $1.2 million decrease in accounts receivable, depreciation and amortization
expense of $0.9 million and a $0.7 million decrease in inventories.

In
fiscal 2009, net cash used in operating activities was $10.9 million, consisting
primarily of losses from operations of $21.7 million, a decrease in allowance
for obsolete inventories of $0.4 million and a $0.2 million decrease of the
minority interest in the net loss of our 60%-owned subsidiary, Gosling-Castle
Partners. These uses of cash were offset partially by the effects of changes in
foreign exchange of $3.7 million, a $2.1 million increase in accounts payable
and accrued expenses, a $0.5 million increase in due to related parties,
stock-based compensation expense of $1.7 million, depreciation and amortization
expense of $1.3 million and a goodwill and other intangible asset impairment of
$4.9 million.

Investing
Activities. We fund operating activities primarily with cash and
short-term investments. Net cash provided by investing activities was $4.0
million for the year ended March 31, 2010, representing $3.7 million in net
proceeds from the sale of certain short-term investments and $0.5 million in
proceeds from the sale of intangible assets, offset by $0.1 million used in the
acquisition of fixed assets and $0.1 million in payments under contingent
consideration agreements.

Net cash provided by investing activities was $0.3 million for the year ended
March 31, 2009. Net proceeds from the purchase and sale of short-term
investments provided $0.6 million, offset by the acquisition of fixed and
intangible assets of $0.2 million and an increase in other assets of $0.1
million.

Financing
activities. Net cash used in financing activities for the year ended
March 31, 2010 was $0.8 million, consisting of the repayment of $0.1 million to
a bank in Ireland under our revolving credit facility, the repayment of $0.5
million on the Betts & Scholl note and $0.2 million for the repurchase of
our common stock.

Net cash provided by financing activities for fiscal 2009 was $13.1 million,
primarily from the issuance of series A preferred stock, net of transaction
costs.

Obligations
and commitments

Irish bank
facilities. We have credit facilities with availability aggregating
approximately €0.5 million ($0.7 million) with an Irish bank, including
overdraft, customs and excise guaranty, and a revolving credit facility. These
facilities are payable on demand, continue until terminated by either party, are
subject to annual review and call for interest at the lender’s AA1 Rate minus
1.70%. We have deposited €0.5 million ($0.7 million) with the bank to secure
these borrowings.

We
believe we are in compliance with the financial covenants of our Irish bank
facilities as of March 31, 2010.

Betts &
Scholl note. In connection with our acquisition of the assets of Betts
& Scholl, LLC in September 2009, we issued a secured promissory note in the
aggregate principal amount of $1.1 million. The note is secured by the Betts
& Scholl inventory acquired under a security agreement. This note provided
for an initial payment of $0.3 million, paid at closing, and for eight equal
quarterly payments of principal and interest, with the final payment due on
September 21, 2011. Interest under the note accrues at an annual rate of 0.84%,
the applicable federal rate on the acquisition date, compounded quarterly. This
note contains customary events of default, which if uncured, entitle the holder
to accelerate the due date of the unpaid principal amount of, and all accrued
and unpaid interest on, this note.

GCP note.
In December 2009, GCP issued the GCP Note in the aggregate principal
amount of $0.2 million to Gosling's Export in exchange for credits issued on
certain inventory purchases. The GCP Note matures on April 1, 2020, is payable
at maturity, subject to certain acceleration events, and calls for annual
interest of 5%, to be accrued and paid at maturity. Interest has been recorded
retroactive to November 15, 2008.

27

Currency
Translation

The functional currencies for our foreign operations are the Euro in Ireland and
continental Europe and the British Pound in the United Kingdom. With respect to
our consolidated financial statements, the translation from the applicable
foreign currencies to U.S. Dollars is performed for balance sheet accounts using
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The resulting
translation adjustments are recorded as a component of other comprehensive
income. Previously, gains or losses resulting from foreign currency
transactions, including balances due from funding our international
subsidiaries, were included in other income (expenses). In November 2009, to
improve the liquidity of our foreign subsidiaries, we converted our intercompany
balances into an additional investment in these subsidiaries. Beginning December
1, 2009, the translation gain or loss from the restatement of the investments in
our foreign subsidiaries is included in other comprehensive income. Prior to
this conversion, we considered these transactions to be trading balances and
short-term funding subject to transaction adjustment. As such, at each balance
sheet date, we restated the Euro denominated intercompany balances included on
the books of the foreign subsidiaries in U.S. Dollars at the exchange rate in
effect at the balance sheet date, with the resulting foreign currency
transaction gain or loss included in net loss.

Where in this annual report we refer to amounts in Euros or British Pounds, we
have for your convenience also in certain cases provided a conversion of those
amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific
balance sheet account date or financial statement account period, we have used
the exchange rate that was used to perform the conversions in connection with
the applicable financial statement. In all other instances, unless otherwise
indicated, the conversions have been made using the exchange rates as of March
31, 2010, each as calculated from the Interbank exchange rates as reported by
Oanda.com. On March 31, 2010, the exchange rate of the Euro and the British
Pound in exchange for U.S. Dollars were € 1.00 = U.S. $1.34530 (equivalent to
U.S. $1.00 = €0.74320) for Euros and £1.00 = U.S. $1.50680 (equivalent to U.S.
$1.00 = £0.66349) for British Pounds.

These conversions should not be construed as representations that the Euro and
British Pound amounts actually represent U.S. Dollar amounts or could be
converted into U.S. Dollars at the rates indicated.

Impact
of inflation

We
believe that our results of operations are not materially impacted by moderate
changes in the inflation rate. Inflation and changing prices did not have a
material impact on our operations during fiscal 2010 or 2009. Severe increases
in inflation, however, could affect the global and U.S. economies and could have
an adverse impact on our business, financial condition and results of
operations.

Recent
accounting pronouncements

We
discuss recently issued and adopted accounting standards in the “Accounting
standards adopted” and “Recent accounting pronouncements” sections of note 1 of
the “Notes to Consolidated Financial Statements” in the accompanying
consolidated financial statements.

Cautionary
Note Regarding Forward-Looking Statements

This annual report includes certain “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements, which involve risks and uncertainties, relate to the discussion of
our business strategies and our expectations concerning future operations,
margins, profitability, liquidity and capital resources and to analyses and
other information that are based on forecasts of future results and estimates of
amounts not yet determinable. We use words such as “may”, “will”, “should”,
“expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “seeks”,
“expects”, “predicts”, “could”, “projects”, “potential” and similar terms and
phrases, including references to assumptions, in this report to identify
forward-looking statements. These forward-looking statements are made based on
expectations and beliefs concerning future events affecting us and are subject
to uncertainties, risks and factors relating to our operations and business
environments, all of which are difficult to predict and many of which are beyond
our control, that could cause our actual results to differ materially from those
matters expressed or implied by these forward-looking statements. These risks
and other factors include those listed under “Risk Factors” and as
follows:

•

our history of losses and
expectation of further
losses;

•

the effect of poor operating
results on our company;

•

the adequacy of our cash
resources and our ability to raise additional
capital;

28

•

our ability to expand our
operations in both new and existing markets and our ability to develop or
acquire new brands;

•

our relationships with and our
dependency on our
distributors;

•

the impact of supply shortages
and alcohol and packaging costs in general, as well as our dependency on a
limited number of suppliers and inventory
requirements;

•

the success of our sales and
marketing activities;

•

economic and political conditions
generally, including the current recessionary economic environment and
concurrent market
instability;

our executive officers, directors
and principal shareholders own a substantial portion of our voting stock;
and

•

the impact of federal, state,
local or foreign government regulations.

We
assume no obligation to publicly update or revise these forward-looking
statements for any reason, or to update the reasons actual results could differ
materially from those anticipated in, or implied by, these forward-looking
statements, even if new information becomes available in the
future.

Item
7A. Quantitative and Qualitative Disclosures about Market Risk

As a
smaller reporting company, we are not required to provide the information
required by this Item.

Consolidated
Statements of Operations for the years ended March 31, 2010 and
2009

33

Consolidated
Statements of Changes in Equity for the years ended March 31, 2010 and
2009

34

Consolidated
Statements of Cash Flows for the years ended March 31, 2010 and
2009

35

Notes
to Consolidated Financial Statements

36

30

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of
Directors and Shareholders

Castle
Brands Inc.

We have
audited the accompanying consolidated balance sheets of Castle Brands Inc. and
subsidiaries (the "Company") as of March 31, 2010 and 2009, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years the ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
March 31, 2010 and 2009, and the consolidated results of its operations,
changes in sharehholders' equity and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.

Description of
business and basis of presentation — The consolidated financial
statements include the accounts of Castle Brands Inc. (the “Company”), its
wholly-owned subsidiaries, Castle Brands (USA) Corp. (“CB-USA”), and
McLain & Kyne, Ltd. (“McLain & Kyne”), and the Company’s
wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited
(“CB-IRL”) and Castle Brands Spirits Marketing and Sales Company Limited
(“CB-UK”), and the Company’s 60% ownership interest in Gosling-Castle
Partners, Inc. (“GCP”), with adjustments for income or loss allocated
based upon percentage of ownership. The accounts of the subsidiaries have
been included as of the date of acquisition. All significant intercompany
transactions and balances have been
eliminated.

B.

Organization and
operations — The Company is principally engaged in the importation,
marketing and sale of premium and super premium brands of vodka, whiskey,
rums, tequila, liqueurs and wines in the United States, Canada, Europe,
Latin America and the Caribbean. The vodka, Irish whiskeys and certain
liqueurs are procured by CB-IRL, billed in Euros and imported from Europe
into the United States. The risk of fluctuations in foreign currency is
borne by the U.S. entities.

C.

Brands —Rum — Gosling’s
rums, a family of premium rums with a 200-year history, including the
award-winning Gosling’s Black Seal rum, for which the Company is, through
its export venture GCP, the exclusive marketer outside of
Bermuda.

Whiskey — three
premium small batch bourbons: Jefferson’s, Jefferson’s Reserve and Jefferson’s
Presidential Select; the Clontarf Irish whiskeys, a family of premium Irish
whiskeys, available in single malt and classic pure grain versions; Knappogue
Castle Whiskey, a vintage-dated premium single-malt Irish whiskey; and Knappogue
Castle 1951, a pure pot-still whiskey that has been aged for 36
years.

Vodka — Boru vodka,
is an ultra-pure, five-times distilled and specially filtered premium vodka.
Boru is produced in Ireland and has three flavor extensions (citrus, orange and
Crazzberry).

Tequila — an organic,
super-premium tequila, Tequila Tierras Autenticas de Jalisco or Tierras. Tierras
was launched in 2009 and is the first USDA certified organic tequila in the
United States. We are the exclusive U.S. importer and marketer of Tierras, which
is available as blanco, reposado and añejo.

Wines - Betts &
Scholl wines, a family of fine wines that includes Grenache, Syrah and Riesling
from Australia, Syrah from California, and Hermitage Blanc and Rouge from
France. Each bottle of Betts & Scholl features the artwork of
internationally renowned contemporary artists.

D.

Cash and cash
equivalents — The Company considers all highly liquid instruments
with a maturity at date of acquisition of three months or less to be cash
equivalents.

E.

Investments —
The Company follows Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 320, “Investments - Debt and
Equity Securities”, classifying its investments based on the intended
holding period. The Company currently classifies its investments as
available-for-sale. Available-for-sale securities are carried at estimated
fair value, based on available market information, with unrealized gains
and losses, if any, reported as a component of shareholders’ equity.
Investments consist primarily of money market accounts and certificates of
deposit that are highly liquid in nature and represent the investment of
cash that is available for current
operations.

Trade accounts
receivable — The Company records trade accounts receivable at net
realizable value. This value includes an appropriate allowance for
estimated uncollectible accounts to reflect anticipated losses on the
trade accounts receivable balances. The Company calculates this allowance
based on its history of write-offs, level of past due accounts based on
contractual terms of the receivables and its relationships with and
economic status of its customers.

G.

Revenue
recognition — Revenue from product sales is recognized when the
product is shipped to a customer (generally a distributor), title and risk
of loss has passed to the customer in accordance with the terms of sale
(FOB shipping point or FOB destination), and collection is reasonably
assured. Revenue is not recognized on shipments to control states in the
United States until such time as product is sold through to the retail
channel.

H.

Inventories —
Inventories are comprised of distilled spirits, bulk wine, dry good raw
materials (bottles, labels, corks and caps), packaging and finished goods,
and are valued at the lower of cost or market, using the weighted average
cost method. The Company assesses the valuation of its inventories and
reduces the carrying value of those inventories that are obsolete or in
excess of the Company’s forecasted usage to their estimated net realizable
value. The Company estimates the net realizable value of such inventories
based on analyses and assumptions including, but not limited to,
historical usage, expected future demand and market requirements. A change
to the carrying value of inventories is recorded in cost of goods sold.
See Note 4.

I.

Equipment —
Equipment consists of office equipment, computers and software and
furniture and fixtures. When assets are retired or otherwise disposed of,
the cost and related depreciation is removed from the accounts, and any
resulting gain or loss is recognized in the statement of operations.
Equipment is depreciated using the straight-line method over the estimated
useful lives of the assets ranging from three to five
years.

J.

Goodwill and other
intangible assets — Goodwill represents the excess of purchase
price including related costs over the value assigned to the net tangible
and identifiable intangible assets of businesses acquired. Goodwill and
other identifiable intangible assets with indefinite lives are not
amortized, but instead are tested for impairment annually, or more
frequently if circumstances indicate a possible impairment may exist.
Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives, generally on a straight-line basis, and
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be
recoverable.

Under ASC
350, “Intangibles - Goodwill and Other”, impairment of goodwill must be tested
at least annually by comparing the fair values of the applicable reporting units
with the carrying amount of their net assets, including goodwill. The required
two-step approach uses accounting judgments and estimates of future operating
results. Changes in estimates or the application of alternative assumptions
could produce significantly different results. The estimates that most
significantly affect the fair value calculation are related to revenue growth,
cost of sales, selling and marketing expenses and discount rates. Impairment
testing is done at the reporting level. If the carrying amount of the reporting
unit’s net assets exceeds the unit’s fair value, an impairment loss is
recognized in an amount equal to the excess of the carrying amount of goodwill
over its implied fair value. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a business combination
with the fair value of the reporting unit deemed to be the purchase price paid.
Rights, trademarks, trade names and formulations are indefinite lived intangible
assets not subject to amortization and are tested for impairment at least
annually. The impairment test consists of a comparison of the fair value of the
asset group allocated to each reporting unit with its allocated carrying
amount.

The fair
value of each reporting unit was determined at March 31, 2010 and 2009 by
weighting a combination of the present value of the Company’s discounted
anticipated future operating cash flows and values based on market multiples of
revenue and earnings before interest, taxes, depreciation and amortization
(“EBITDA”) of comparable companies. The Company did not record an impairment on
goodwill or other intangible assets for the year ended March 31, 2010. The
valuations resulted in the Company recording a goodwill impairment of $3,745,287
and an impairment on its indefinite lived intangible assets, comprised of trade
names and distribution rights, of $1,100,000 for the year ended March 31, 2009.
Such adjustments were attributable to downward revisions of earnings forecasted
for future years, particularly as they relate to the international operations,
and an overall decrease to the value of the comparable companies.

K.

Impairment of
long-lived assets — Under the ASC 310, “Accounting for the
Impairment or Disposal of Long-lived Assets”, the Company periodically
reviews whether changes have occurred that would require revisions to the
carrying amounts of its definite lived, long-lived assets. When the sum of
the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized based on the fair value of the
asset. The Company concluded that there was no impairment during the year
ended March 31, 2010 on its definite lived intangible
assets.

Shipping and
handling — The Company reflects as inventory costs freight-in and
related external handling charges relating to the purchase of raw
materials and finished goods. These costs are charged to cost of sales at
the time the underlying product is sold. The Company also incurs shipping
costs in connection with its various marketing activities, including the
shipment of point of sale materials to the Company’s regional sales
managers and customers, and the costs of shipping product in connection
with its various marketing programs and promotions. These shipping charges
are included in selling expense. The Company changed to “delivered
pricing” in the year ended March 31, 2010, in which the Company is
responsible for all shipping charges to its distributors and includes
these charges in its price to the distributor. Previously, the individual
distributors were responsible for shipping costs. Shipping charges
included in selling expense amounted to $455,014 and $123,018 for the
years ended March 31, 2010 and 2009,
respectively.

M.

Excise taxes and
duty — Excise taxes and duty are computed at standard rates based
on alcohol proof per gallon/liter and are paid after finished goods are
imported into the United States and then transferred out of “bond.” Excise
taxes and duty are recorded to inventory as a component of the cost of the
underlying finished goods. When the underlying products are sold “ex
warehouse”, the sales price reflects the taxes paid and the inventoried
excise taxes and duties are charged to cost of
sales.

N.

Distributor charges
and promotional goods — The Company incurs charges from its
distributors for a variety of transactions and services rendered by the
distributor, including product depletions, product samples for various
promotional purposes, in-store tastings and training where legal, and
local advertising where legal. Such charges are reflected as selling
expense as incurred. Also, the Company has entered into arrangements with
certain of its distributors whereby the purchase of a particular product
or products by a distributor is accompanied by a percentage of the sale
being composed of promotional goods or as a predetermined discount
percentage of dollars off invoice. In such cases, the cost of the
promotional goods is charged to cost of sales and dollars off invoice are
a reduction to revenue.

O.

Foreign
currency — The functional currency for the Company’s foreign
operations is the Euro in Ireland and the British Pound in the United
Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from
the applicable foreign currencies to U.S. Dollars is performed for balance
sheet accounts using exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange
rate during the period. The resulting translation adjustments are recorded
as a component of other comprehensive income. Gains or losses resulting
from foreign currency transactions are shown as a separate line item in
the consolidated statements of operations. The Company’s vodka, Irish
whiskeys and certain liqueurs are procured by CB-IRL and billed in Euros
to CB-USA, with the risk of foreign exchange gain or loss resting with
CB-USA. Also, the Company has funded the continuing operations of the
international subsidiaries. The Company previously considered these
transactions to be trading balances and short-term funding subject to
transaction adjustment under ASC 830. As such, at each balance sheet date,
the Euro denominated intercompany balances included on the books of the
foreign subsidiaries were restated in U.S. Dollars at the exchange rate in
effect at the balance sheet date, with the resulting foreign currency
transaction gain or loss included in net loss. In November 2009, in order
to improve the liquidity of the foreign subsidiaries, the Company decided
to eliminate $17,481,169 in intercompany balances by converting such
balances into an additional investment in the subsidiaries. Beginning
December 1, 2009, the translation gain or loss from the investments in the
foreign subsidiaries is included in other comprehensive
income.

P.

Fair value of
financial instruments — ASC 825, “Financial Instruments”, defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties and requires disclosure of the fair value of certain financial
instruments. The Company believes that there is no material difference
between the fair-value and the reported amounts of financial instruments
in the Company’s balance sheets due to the short term maturity of these
instruments, or with respect to the Company’s debt, as compared to the
current borrowing rates available to the
Company.

The
Company’s investments are reported at fair value in accordance with
authoritative guidance, which accomplishes the following key
objectives:

•

Defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date;

Requires
consideration of a company’s creditworthiness when valuing liabilities;
and

•

Expands
disclosures about instruments measured at fair
value.

The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. A financial instrument’s
categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The three levels of the
valuation hierarchy are as follows:

•

Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.

•

Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the
financial instrument.

•

Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.

Income taxes —
Under ASC 740, “Income Taxes”, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. A valuation allowance is
provided to the extent a deferred tax asset is not considered
recoverable.

The
Company has adopted the provisions of ASC 740 and has recognized no adjustment
for uncertain tax provisions. The Company recognizes interest and penalties
related to uncertain tax positions in general and administrative expense;
however, no such provisions for accrued interest and penalties related to
uncertain tax positions have been recorded as of March 31, 2010.

R.

Research and
development costs — The costs of research, development and product
improvement are charged to expense as incurred and are included in selling
expense.

S.

Advertising —
Advertising costs are expensed when the advertising first appears in its
respective medium. Advertising expense, which is included in selling
expense, was $1,628,427 and $1,555,911 for the years ended March 31, 2010
and 2009, respectively.

T.

Use of
estimates — The preparation of financial statements in conformity
with U.S. Generally Accepted Accounting Principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates include the
accounting for items such as evaluating annual impairment tests,
derivative instruments and equity issuances, stock-based compensation,
allowances for doubtful accounts and inventory obsolescence, depreciation,
amortization and expense accruals.

U.

Uncertainties —
The Company depends on a limited number of third-party suppliers for the
sourcing of all of its products, including both its own proprietary brands
and those it distributes for others. The Company does not have long-term
written agreements with all of its suppliers. Also, if the Company fails
to complete purchases of products ordered annually, certain suppliers have
the right to bill it for product not purchased during the period.
Suppliers’ failure to perform satisfactorily or handle increased orders,
delays in shipments of products from international suppliers or the loss
of existing suppliers, especially key suppliers, could have material
adverse effects on the Company’s operating results. The inability to
maintain, renew on acceptable terms or find suitable alternatives to the
Company’s contracts with suppliers could have a material adverse effect on
its operating results.

V.

Accounting standards
adopted — In August 2009, the FASB issued authoritative guidance
which amends existing GAAP for fair value measurement guidance by
clarifying the fair value measurement requirements for liabilities that
lack a quoted price in an active market. Per the guidance, a valuation
technique based on a quoted market price for the identical or similar
liability when traded as an asset or another valuation technique (e.g., an
income or market approach) that is consistent with the underlying
principles of GAAP for fair value measurements would be appropriate. The
guidance was effective August 2009, the issuance date, and had no material
impact on the Company’s results of operations, cash flows or financial
condition.

In June
2009, the ASC was issued. The ASC is the source of authoritative GAAP to be
applied by nongovernmental entities. The ASC is effective for financials
statements issued for interim and annual periods ending after September 15,
2009. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. All
other accounting literature not included in the ASC is non-authoritative. The
adoption of the ASC did not have a material impact on the Company’s results of
operations, cash flows or financial condition.

In June
2008, the FASB issued authoritative guidance in determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock. The
guidance outlines a two-step approach to evaluate the instrument’s contingent
exercise provisions, if any, and to evaluate the instrument’s settlement
provisions when determining whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock. The Company implemented
these provisions effective for the 2010 fiscal year and these provisions did not
have a material impact on the Company’s results of operations, cash flows or
financial condition.

In
December 2007, the FASB issued authoritative guidance regarding noncontrolling
interests in consolidated financial statements that provides that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This presentation is based upon the view of the
consolidated business as a single economic entity and considers minority
ownership interests in consolidated subsidiaries as equity in the consolidated
entity.

The
standard requires that companies:

•

present noncontrolling interests
(formerly described as “minority interests”) in the consolidated balance
sheet as a separate line item within
equity;

•

separately present on the face of
the income statement the amount of consolidated net income (loss)
attributable to the parent and to the noncontrolling
interest;

•

account for changes in ownership
interests that do not result in a change in control as equity
transactions; and

•

upon deconsolidation of a
subsidiary due to a change in control, measure any retained interest at
fair value and record a gain or loss for both the portion sold and the
portion retained.

The
Company adopted this standard for the 2010 fiscal year and this standard did not
have a material impact on the Company’s results of operations, cash flows or
financial condition. Further, the adoption of the standard had no effect on
earnings-per-share because under the guidance, earnings-per-share data will
continue to be calculated in the same way that data were calculated before the
standard was issued.

W.

Reclassifications
— In accordance with the authoritative guidance the Company adopted on
April 1, 2009, the Company has presented and disclosed noncontrolling
interests in its consolidated financial statements. Specifically, the
Company:

•

reclassified $82,037 of
noncontrolling interests at April 1, 2009 in GCP to a separate line within
total equity;

•

recorded $227,773 of net loss
attributable to noncontrolling interests in a separate line on the
consolidated statements of operations after net loss to arrive at net loss
attributable to common shareholders for the year ended March 31,
2009;

•

recorded $82,037 of net income
attributable to noncontrolling interests for the year ended March 31,
2009, in a separate line on the consolidated statement of equity;
and

included $227,773 of net loss
attributable to noncontrolling interests in the net loss in the
consolidated statements of cash flows for the year ended March 31,
2009.

X.

Recent accounting
pronouncements — In June 2009, the FASB issued authoritative
guidance which eliminates the concept of a qualifying special-purpose
entity, creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale, clarifies other sale-accounting
criteria, and changes the initial measurement of a transferor’s interest
in transferred financial assets. This guidance became effective for the
Company on April 1, 2010. The adoption of the standard did not have a
material impact on the Company’s results of operations, cash flows or
financial condition.

In June
2009, the FASB issued authoritative guidance which eliminates exceptions to
consolidating qualifying special-purpose entities, contains new criteria for
determining the primary beneficiary, and increases the frequency of required
reassessments to determine whether a company is the primary beneficiary of a
variable interest entity. This guidance also contains a new requirement that any
term, transaction, or arrangement that does not have a substantive effect on an
entity’s status as a variable interest entity, a company’s power over a variable
interest entity, or a company’s obligation to absorb losses or its right to
receive benefits of an entity must be disregarded. The elimination of the
qualifying special-purpose entity concept and its consolidation exceptions means
more entities will be subject to consolidation assessments and reassessments.
This guidance became effective for the Company on April 1, 2010. The adoption of
the standard did not have a material impact on the Company’s results of
operations, cash flows or financial condition.

In June
2009, the FASB issued an amendment to the accounting and disclosure requirements
for the consolidation of variable interest entities. The guidance affects the
overall consolidation analysis and requires enhanced disclosures on involvement
with variable interest entities. This guidance became effective for the Company
on April 1, 2010. The adoption of the standard did not have a material impact on
the Company’s results of operations, cash flows or financial
condition.

NOTE 2 —BASIC AND
DILUTED NET LOSS PER COMMON SHARE

Basic net
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Diluted potential common shares consist
of incremental shares issuable upon exercise of stock options and warrants
outstanding. In computing diluted net loss per share for the years ended March
31, 2010 and 2009, no adjustment has been made to the weighted average
outstanding common shares as the assumed exercise of outstanding options and
warrants is anti-dilutive.

Potential
common shares not included in calculating diluted net loss per share are as
follows: